Beams 11 PPT 16 Partnerships

Chapter 16
Partnerships
Formation, Operations,
and Changes in
Ownership Interests
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
16-1
Partnerships: Objectives
1. Comprehend the legal
characteristics of partnerships.
2. Understand initial investment
valuation and record keeping.
3. Grasp the diverse nature of profit
and loss sharing agreements and
their computation.
16-2
Partnerships: Objectives (cont.)

4. Value a new partner's investment in
an existing partnership.
5. Value a partner's share upon
retirement or death.
6. Understand limited liability
partnership characteristics.

16-3
Partnerships Formation, Operations, and

Changes in Ownership Interests
1: PARTNERSHIP
CHARACTERISTICS

16-4
Partnerships
RUPA "Revised Uniform Partnership Act
Has been adopted by most states
Entity theory:
partners own their share of the partnership, but not
its individual assets
Dissociation:
partners can dissociate without dissolution of the
partnership
Partners have
Mutual agency the ability to legally bind the partnership
Unlimited liability liable for partnership debts,
including the use of personal assets
16-5
Articles of Partnership
The partnership agreement should
specify:
1. Products or services, line of business
2. Partner rights and responsibilities
3. Initial investment and value assigned
to noncash investments
4. Additional investment conditions
5. Asset withdrawals
6. Profit and loss sharing
7. Dissolution procedures
16-6
Partnership Reporting
Financial reporting should provide for
the needs of
Partners
Creditors of the partnership
IRS partnerships do not pay federal
income taxes, but partnership tax returns
allow the IRS to verify that each partner pays
income taxes on their share of partnership
income
16-7

2: INITIAL INVESTMENT

16-8
Initial Investment
A partnership is started by Amy and Paul, each
investing cash.
Cash
Amy Capital
Cash
Paul Capital
XXX
Cash
Equipment
Land
Paul Capital
XXX
XXX
XXX
XXX
XXX
XXX
If Paul invests other assets, the value of those

assets should be agreed upon in advance.

XXX
16-9
Bonus or Goodwill on Initial Investment

Partner initial investments may not represent
ownership percentage. Partners may bring
Individual talent
Business connections
Customer base
Intellectual know-how
Partners choose method to record their capital
Bonus method
Adjustment within the capital accounts
Goodwill method
Goodwill is recorded on the books
16-10
Initial Investment with Bonus

Total fair value received is split, as desired,
between partner capital accounts.
For example: Amy invests land and building
worth $10 and $40, and Paul invests cash and
inventory at $7 and $35. They agree to have
equal shares: (10 + 40 + 7 + 35) / 2 = $46 each
Cash
Inventory
Land
Building
Amy Capital
Paul Capital
7
35
10
40
46
16-11
46
Initial Investment with Goodwill

The partner contributing the greater fair value
sets the implied value of the partnership, and
goodwill is recorded to make up the difference
for the partner who invested the lesser amount.
In the Amy and Paul partnership:
Amy's: (10 + 40) / 50% = $100
Paul's: (7 + 35) / 50% = $84
Use Amys investment to determine implied value
of firm -- $100.
16-12
Initial Entry with Goodwill

Amy's 50%($100)
She invests:
Land
$10
Building $40
$50
$50
Paul's 50%($100)
He invests:
Cash
$7
Inventory $35
Goodwill
Land
Building
Amy Capital
To record Amy's investment
Cash
Inventory
Goodwill
Paul Capital
$50
$42
$8
10
40
50
7
35
8
50
16-13
Additional Partner Transactions

Each partner has his/her own accounts for
Capital (the balance of a partners equity)
Drawings (periodic amounts, similar to a salary)
Withdrawals (other large or unusual amounts)
Additional investments increase Capital.
Drawings and withdrawals reduce Capital.
Income Summary (Revenue and Expense
Summary) is closed to Capital.
16-14
Sample Partner Closing Entries

Drawings /
withdrawals
are closed to
individual
capital
accounts.
Amy Capital
Amy Drawings
Amy Withdrawals
XXX
XX
XX
Reduces Amy's capital for drawings and withdrawals
Paul Capital
XXX
Paul Drawings
Income Summary
Profit
Amy Capital
Paul Capital
To sharethe
profits
between
Amy
andcause
Paul
Income is shared between
partners.
A loss
would
XXX
XXX
XXX
the entry to be reversed. It is possible for some partners to

have losses overall while others have profits.
16-15
Statement of Partners' Capital
Beginning capital + investments drawings and/or

withdrawals + income or loss = ending capital
16-16

3: PROFIT AND LOSS

SHARING AGREEMENTS

16-17
Profit/Loss Sharing Agreements

The partnership articles should clearly state
the means of distributing profits and
distributing losses.
Items commonly considered
Bonus allowance
Salary allowance
Interest allowance on capital invested
Based on average, beginning or ending
capital balance
Sharing of remaining amounts
16-18
Bonus and Salary Allowances

Bonus allowances are often based on
partnership profits and may be before or after:
(a) salary allowances and (b) bonus.
If the bonus is after both:
Bonus = b% x (NI Salary Allow Bonus)
Salary allowances are generally pre-determined
amounts, provided to partners who manage the
partnership. Salary allowances are not
expenses in the determination of partnership
net income.
16-19
Interest Allowances and Capital

Interest Allowances are generally based on a
measure of the partner's capital
Beginning of the year capital balance
Average* capital balance for the year
Weighted average balance
Ending* capital balance

Beginning balance withdrawals + investments
* Periodic drawings are often ignored, although

withdrawals are considered
16-20
Allocating Income
Partners allowances for bonus, salary and
interest are allocated to them, whether or not
sufficient profits exist.
Remaining profits (or deficit) are then split
according to the agreed-upon proportions.
These are general procedures. The partnership
articles provide the specific requirements.
16-21
Example: Sharing Profits

Lot and Babel agree to share profits and losses:
Lot and Babel have $60 and $30 salary
allowances, respectively
Babel has a bonus of 50% of profits in excess
of $500
Each have interest allowances of 10% of
beginning capital
Lot Capital, 1/1 $400
Babel Capital, 1/1 $350
Remaining profits or losses are shared Lot 60%,
Babel 40%
Partnership profits are $660 for the year.
16-22
Example: Sharing Profits (cont.)

Total Lot Babel
Net income
$660
Salary allowance
(90) $60
$30
Bonus allowance
(80)
0
80
Interest allowance
(75)
40
35
Subtotal
$415
Split 60:40
(415) 249
166
Bonus
= 50%(660
- 500) = 80$0 $349 $311
Allocated
net income
Lot Interest = 10%(400) = 40

Babel Interest = 10%(350) = 35
Allocation: 60%(415) = 249; 40%(415) = 166

16-23
Example: Sharing Profits (cont.)

Assume instead that income was only $180.
Total
Net income
$120
Salary allowance
(90)
Bonus allowance
0
Interest allowance
(75)
Subtotal, deficit
($45)
Split 60:40
45
Bonus
= zeronet
(income
Allocated
income does not
$0
Lot Babel
$60
0
40
$30
0
35
(27) (18)
exceed
$500)
$73
$47
Lot Interest = 10%(400) = 40

Babel Interest = 10%(350) = 35
Allocation: 60%(-45)
= -27; 40%(-45) = -18
16-24

4: ADMITTING A NEW
PARTNER

16-25
Admitting a New Partner

There are three methods of entry for a new
partner into an existing partnership:
1. A current partner assigns interest to new
partner.
2. New partner purchases interest from
existing partner.
Goodwill method
Bonus method
3. New partner invests directly in partnership.
Goodwill method
Bonus method
16-26
Assignment
Assignment gives the assignee the right to a
share of future earnings and share of assets in
liquidation
Not a partner
No share in management
Old Partner Capital
Assignee Capital
XXX
XXX
Note that this means one partner can not make

the decision to admit a new partner into the
partnership, only to legally assign the financial
rights of ownership.
16-27
Buy from Partner: Simple

Abby and Bing have capital balances of $50
each and each have a 50% interest in the firm.
Cobb buys half of Abby's interest for $25.
Abby Capital
Cobb Capital
Abby
Bing
Cobb
Total
25
25
Before
Capital Share
$50
50%
50
50%
$100
After
Capital Share
$25
25%
50
50%
25
25%
$100
16-28
Buy from Partner: Goodwill

Dawn and Ed have capital of $50 and $40, each
with 50% interest.
Fay will pay $60 directly to the partners and
receive 50% interest in the firm. Dawn and Ed
each keep 25%. Assets are at fair value.
Implied value of firm, $60/.50
120
Old capital, $50 + 40
90
Goodwill
30
The goodwill increases Dawn & Ed's capital by

$15 each.
16-29
Buy from Partner: Goodwill (cont.)

Dawn
Ed
Fay
Total
After
Before Revaluation revaluation
$50
$15
$65
40
15
55
$90
$120
Transfer
($35)
(25)
60
Final
$30
30
60
$120
Presumably, Fay paid $35 to Dawn and $25 to Ed.

If the partners had not wanted to realign the
capital, the capital of Dawn and Ed would each be
reduced by $30 to transfer the $60 to Fay.
16-30
Buy from Partner: Bonus

If Dawn and Ed had decided not to revalue the
assets or record goodwill, the bonus method is
used.
Dawn
Ed
Fay
Total
Before
$50
40
$90
Transfer Final
($27.5) $22.5
(17.5) 22.5
45.0
45.0
$90.0
Fay's capital is 50%(90) = $45.

Dawn and Ed Capital accounts are adjusted to
their new balances 25%(90) = $22.5
16-31
Entries for Purchase from Partner

Entries for Fay's admission, under goodwill
and bonus methods:
Goodwill
30
Dawn Capital
Ed Capital
Dawn Capital
35
Ed Capital
25
Fay Capital
Goodwill
method, aligning capital accounts 27.5
Dawn Capital
Ed Capital
17.5
Fay Capital
Bonus method, aligning
capital
accounts
Copyright
2012 Pearson
Education,
15
15
60
45
16-32
New Partner Investment:

Goodwill to Old Partners
Al and Bev each have capital balances of $40
and share equally in the firm. Cal will be
admitted with an investment of $50 cash.
All three will have equal shares, and net assets
are at fair value. Goodwill will be recorded.
Implied value of firm, $50/(1/3)
$150
$80
Additional investment
50
130
Goodwill
$20
Cal: $130*1/3 = $43.3, but he pays $50 so goodwill
goes to old partners. Implied firm value is based on
Cal's investment.
16-33

Goodwill to Old Partners (cont.)
ReAfter reBefore valuation valuation Investment Final
Al
$40
$10
$50
$50
Bev
40
10
50
50
Cal
$50
50
Total
$80
$100
$150
Capital of $80 at the start, increases by the

$20 goodwill and the $50 cash investment.

16-34

Goodwill to New Partner
Al and Bev each have capital balances of $40
and share equally in the firm. Cal will be
admitted with an investment of $50 cash.
Cal will be given a 40% share; Al and Bev will
each have 30%, and net assets are at fair value.
Goodwill will be recorded.
Implied value of firm, $80/(.60)
$133.3
$80
Additional investment
50
130.0
Goodwill
$3.3
Cal: $130*40% = $52, but he pays $50 so goodwill goes
to new partner. Implied firm value is based on old partners'
capital and retained interest.
16-35

Goodwill to New Partner (cont.)
Al
Bev
Cal
Total
ReAfter reBefore valuation valuation Investment Final

$40
$40
$40.0
40
40
40.0
$3.3
3.3
$50
53.3
$80
$83.3
$133.3
Capital of $80 at the start, increases by the

$3.3 goodwill and the $50 cash investment.

16-36
New Partner Investment: Bonus

Al and Bev decide not to revalue the business
assets, and Cal invests $50 cash in the
business for a 1/3 interest.
Al
Bev
Cal
Total
Before Investment
$50
40
$50
$90
Bonus
($1)
(1)
2
Final
$49
39
52
$140
Cal's new capital = 1/3 of the total $140. Since

he invests $50 cash for a $52 interest, the $2
bonus is transferred from the old partners.
16-37
Entries for Investment in Business

Entries for Cal's investment, under goodwill
and bonus methods:
Goodwill
Al Capital
Bev Capital
Cash
Cal Capital
Goodwill
method, goodwill to old partners
Cash
Al Capital
Bev Capital
Cal Capital
2012 Pearson Education,
Bonus method, bonusCopyright
to
new
partner
20
10
10
60
60
50
1
1
52
16-38

5: DEATH OR RETIREMENT
OF A PARTNER

16-39
Dissociation
Firm value, according to the Uniform Partnership
Act, is the greater of
Liquidation value
Sales value as a going concern without the dissociated
partner
Payment to exiting partner may be
Equal to existing capital
More than existing capital
Implied goodwill or bonus to exiting partner
Less than existing capital
Write down overvalued assets, or bonus to remaining
partners
16-40
Payment to Exiting Partner

Mo, Nel, and Owen are partners with capital
balances and profit-sharing percentages, shown
respectively, as follows:
Owen retires, and his partnership interest is

paid out by the partnership.
16-41
Payment Equals Partner Capital

Owen Capital
Cash
80
80
The Mo, Nel, and Owen partnership would be

dissolved. Mo and Nel could continue the
partnership, but would need to establish a new
partnership agreement if a partners retirement
was not addressed in the original partnership
agreement.
16-42
Payment Exceeds Partner Capital

If Owen is paid $92,000 in final settlement of
his partnership interest, the excess may be
treated as
1. A bonus to Owen, or
2. Goodwill, in the amount of the excess, or
3. A revaluation of partnership capital based
on the fair value implied by the excess.

16-43
Excess Payment:
Bonus to Exiting Partner
Mo Capital
Nel Capital
Owen Capital
Cash
80
8
4
92
By treating the excess payment as a bonus to

Owen, Mo and Nel each have their capital
accounts reduced by their relative profit
sharing ratios of 40:20, for the total amount of
the $12,000 bonus amount.
16-44
Excess Payment:
Goodwill Recorded
Owen Capital
Goodwill
Cash
80
12
92
By treating the excess payment as an

indication that partnership assets were
undervalued, Goodwill is recorded. Note
that Mo and Nels capital accounts are not
revalued.
16-45
Excess Payment:
Used to Revalue Partnership Capital
Goodwill
Mo Capital
Nel Capital
Owen Capital
30
12
6
12
The excess payment is used to determine the

implied fair value of the partnership.
$12,000 excess / Owens 40% share =

implied partnership under-valuation of $30,000
Owen Capital
Cash
92
92
The exiting partner is then paid the amount of

his capital account.
16-46

6: LIMITED PARTNERSHIPS

16-47
Limited Partnerships
Limited partnerships must have one or
more general partners with unlimited
liability for partnership debt.
There may be any number of limited
partners.
Excluded from participating in management
Limited liability for partnership debt
Partnership agreement must be in writing,
signed and filed
16-48
This work is protected by United States copyright laws

and
is provided solely for the use of instructors in
teaching
their courses and assessing student learning.
Dissemination or sale of any part of this work
(including on the World Wide Web) will destroy
the
integrity of the work and is not permitted. The
work and materials from it is should never be made
available to students except by instructors using the
accompanying text in their classes. All recipients of this
work are expected to abide by these restrictions and to
All rights
reserved. No part of this publication may be
honor the intended pedagogical purposes and the
reproduced,
in instructors
a retrieval system,
or on
transmitted,
in any
needs stored
of other
who rely
these materials.
form or by any means, electronic, mechanical, photocopying,

recording, or otherwise, without the prior written permission of
the publisher. Printed in the United States of America.
16-49

Beams 11 PPT 16 Partnerships

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Beams 11 PPT 16 Partnerships

Hochgeladen von

Copyright:

Verfügbare Formate

Chapter 16

Partnerships: Objectives (cont.)

Copyright 2012 Pearson Education,

Partnerships Formation, Operations, and

Copyright 2012 Pearson Education,

Partnerships Formation, Operations, and

Copyright 2012 Pearson Education,

If Paul invests other assets, the value of those

Copyright 2012 Pearson Education,

Bonus or Goodwill on Initial Investment

Initial Investment with Bonus

Initial Investment with Goodwill

Initial Entry with Goodwill

Additional Partner Transactions

Sample Partner Closing Entries

Reduces Amy's capital for drawings and withdrawals

the entry to be reversed. It is possible for some partners to

Statement of Partners' Capital

Beginning capital + investments drawings and/or

Partnerships Formation, Operations, and

3: PROFIT AND LOSS

Copyright 2012 Pearson Education,

Profit/Loss Sharing Agreements

Bonus and Salary Allowances

Interest Allowances and Capital

Ending* capital balance

* Periodic drawings are often ignored, although

Example: Sharing Profits

Example: Sharing Profits (cont.)

Lot Interest = 10%(400) = 40

Allocation: 60%(415) = 249; 40%(415) = 166

Example: Sharing Profits (cont.)

Lot Interest = 10%(400) = 40

Partnerships Formation, Operations, and

Copyright 2012 Pearson Education,

Admitting a New Partner

Note that this means one partner can not make

Buy from Partner: Simple

Buy from Partner: Goodwill

Old capital, $50 + 40

The goodwill increases Dawn & Ed's capital by

Buy from Partner: Goodwill (cont.)

Presumably, Fay paid $35 to Dawn and $25 to Ed.

Buy from Partner: Bonus

Fay's capital is 50%(90) = $45.

Entries for Purchase from Partner

New Partner Investment:

New Partner Investment:

Capital of $80 at the start, increases by the

Copyright 2012 Pearson Education,

New Partner Investment:

New Partner Investment:

ReAfter reBefore valuation valuation Investment Final

Capital of $80 at the start, increases by the

Copyright 2012 Pearson Education,

New Partner Investment: Bonus

Cal's new capital = 1/3 of the total $140. Since

Entries for Investment in Business

Partnerships Formation, Operations, and

Copyright 2012 Pearson Education,

Payment to Exiting Partner

Owen retires, and his partnership interest is

Payment Equals Partner Capital