17 - 1 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater

Partnerships
Chapter 17
17 - 2 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Journalizing the entry for
formation of a partnership.
Learning Objective 1
17 - 3 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
A binding legal agreement
The Uniform Partnership Act
provides the legal background.
An informal agreement
Easy to form
Learning Unit 17-1
(Partnership Characteristics)
17 - 4 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Partnership agreements
should be in writing
to avoid future conflicts
and misunderstanding.
Learning Unit 17-1
(Partnership Characteristics)
17 - 5 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-1
(Partnership Characteristics)
Limited life
Mutual agency
Unlimited liability
Co-ownership of property
Taxation
17 - 6 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-1
(Partnership Characteristics)
The current appraised value
of the equipment is $28,000.
On June 1, 20xx, Jane Reedy and
Bill Burr enter into a partnership.
Reedy invests $9,000 cash plus store
equipment worth $25,000 with
accumulated depreciation of $5,000.
17 - 7 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-1
(Partnership Characteristics)
Burr invests $20,000 cash.
Reedy also invested Accounts Receivable
of $2,000 with an Allowance for
Doubtful Accounts of $500.
The partnership will take on the responsibility
for a $6,000 note issued by Reedy.
What are the journal entries?
17 - 8 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-1
(Partnership Characteristics)
June 1, 20xx
Cash 9,000
Accounts Receivable 2,000
Equipment 28,000
Allowance for Doubtful Accounts 500
Note Payable 6,000
J. Reedy, Capital 32,500
June 1, 20xx
Cash 20,000
B. Burr, Capital 20,000
17 - 9 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Calculating a partners share
of net income based on
fractional ratio, beginning
capital investment, and
salary and interest allowances.
Learning Objective 2
17 - 10 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-2 (Division of
Net Income or Net Loss)
How do partners share profit and losses?
Salary allowance
Equally
Capital contribution
Interest allowance
Ratio based on investment
17 - 11 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-2 (Division of
Net Income or Net Loss)
Dot Alexander, John Sullivan, and
Sheldon Brown invested $8,000,
$6,000, and $4,000 respectively,
in a partnership.
The partnership had a net income
of $24,300 in the first year.
17 - 12 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-2 (Division of
Net Income or Net Loss)
Partners could not agree on how
to share net income of $24,300.
$24,300 3 = $8,100 to each partner
December 31, 20xx
Income Summary 24,300
Alexander, Capital 8,100
Sullivan, Capital 8,100
Brown, Capital 8,100
17 - 13 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-2 (Division of
Net Income or Net Loss)
Partners share net income in the ratio
of their beginning capital investments.
Alexander $ 8,000 18,000 24,300 = $10,800
Sullivan 6,000 18,000 24,300 = $ 8,100
Brown 4,000 18,000 24,300 = $ 5,400
Total $18,000 $24,300
17 - 14 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-2 (Division of
Net Income or Net Loss)
a. Annual salary allowance of $6,000
to Alexander, $6,000 to Sullivan,
and $9,000 to Brown.
b. Ten percent interest on each
partners capital investment.
c. Remaining net income or
net loss shared equally.
17 - 15 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-2 (Division of
Net Income or Net Loss)
a. Salary allowance $6,000 $6,000 $9,000 $21,000
b. Interest on capital
.10 $8,000 800
.10 $6,000 600
.10 $4,000 400
Total interest allowance 1,800
Total salary and interest $6,800 $6,600 $9,400 $22,800
c. Net income $24,300
Less 22,800
Equals $ 1,500 3 500 500 500
Share of net income $7,300 $7,100 $9,900 $24,300
Alexander Sullivan Brown Total
17 - 16 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Preparing a statement
of partners equity.
Learning Objective 3
17 - 17 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-2 (Division of
Net Income or Net Loss)
It also shows drawings by partner.
A partnership statement of owners equity
is much like that of a proprietorship.
The statement of owners equity shows
additional investments by partner.
17 - 18 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-2 (Division of
Net Income or Net Loss)
Alexander, Sullivan, and Brown
Statement of Partners Equity
For Year Ended December 31, 20xx
Alexander Sullivan Brown
Capital balances, Jan. 1, 20xx $ 8,000 $ 6,000 $ 4,000
Add: Net income for 20xx 7,300 7,100 9,900
Totals $15,300 $13,100 $13,900
Less: Withdrawals 4,000 5,000 8,000
Capital balances, Dec. 31, 20xx $11,300 $ 8,100 $ 5,900
17 - 19 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Journalizing entries to record
admitting a new partner,
withdrawal of a partner,
and bonuses to partners.
Learning Objective 4
17 - 20 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-3 (Recording
Admissions and Withdrawing)
1. Purchase an equity interest from one
or more of the existing partners.
2. Make an investment into the business.
There are two ways to join a partnership.
17 - 21 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-3 (Recording
Admissions and Withdrawing)
Assets
Cash $ 5,000
Other assets 7,000
Total assets $12,000
Partners Equity
Jones, Capital $ 6,000
Ryan, Capital 6,000
Total equities $12,000
Jones and Ryan
17 - 22 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-3 (Recording
Admissions and Withdrawing)
Assume that Ryan sells his interest to Mr. Mix.
April 3, 20xx
Ryan, Capital 6,000
Mix, Capital 6,000
17 - 23 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-3 (Recording
Admissions and Withdrawing)
Bonus is to the new partner when less
is paid than the interest acquired.
New partners capital account is set up.
Cash is paid to the partnership.
Bonus is to the old partners when more
is paid than the interest acquired.
17 - 24 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-3 (Recording
Admissions and Withdrawing)
A partner may withdraw according to an
agreement that results in the partner
leaving with more or less than book value.
Assets are adjusted to fair market value.
Any gain or loss in the revaluation
is shared according to the
partners profit and loss ratio.
17 - 25 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Journalizing entries involved
in the liquidation process
and preparing a statement
of liquidation.
Learning Objective 5
17 - 26 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 17-4 (The
Liquidation of a Partnership)
Assets are sold for cash.
Any loss or gain is divided
among the partners.
Creditors are paid off.
Any remaining cash is
distributed to the partners.
17 - 27 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
End of Chapter 17