0 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 6 Additional Accounting Topics Chapter 27 Introduction to Partnerships Chapter 28Financial Statements and Liquidation of a Partnership Chapter 29Ethics in Accounting

1 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 28 Financial Statements and Liquidation of a Partnership What You’ll Learn  Prepare an income statement for a partnership.  Prepare a statement of changes in partners’ equity.  Prepare the Partners’ Equity section of a balance sheet.  Account for partnership liquidation losses.  Account for partnership liquidation gains.  Prepare the final entry to liquidate a partnership.  Define the accounting terms introduced in this chapter.

2 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 28, Section 1 Financial Statements for a Partnership What Do You Think? If you were a partner in a partnership, what items would you expect to see in your financial statements?

3 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Financial statements for a partnership report the details of each partner’s capital. You Will Learn  how to prepare a partnership income statement.  how to prepare a statement of changes in partners’ equity.  how to prepare the Partners’ Equity section of the balance sheet. Financial Statements for a Partnership SECTION 28.1

4 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Term  statement of changes in partners’ equity Financial Statements for a Partnership SECTION 28.1

5 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Income Statement A partnership’s income statement is prepared in the same way as that for any business. The division of net income may or may not be shown on the income statement. Financial Statements for a Partnership SECTION 28.1

6 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Statement of Changes in Partners’ Equity The statement of changes in partners’ equity reports the change in partners’ capital account resulting from business operations, investments, and withdrawals. It is similar to the statement of owner’s equity for a sole proprietorship.statement of changes in partners’ equity Financial Statements for a Partnership SECTION 28.1

7 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Balance Sheet The owners’ equity section of the balance sheet is called the Partners’ Equity section. Financial Statements for a Partnership SECTION 28.1

8 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Term Review  statement of changes in partners’ equity A financial statement that reports the change in each partner’s capital account resulting from business operations, investments, and withdrawals. Financial Statements for a Partnership SECTION 28.1

9 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 28, Section 2 Liquidation of a Partnership What Do You Think? What does the term liquidation sale mean to you?

10 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea In a liquidation the assets are sold, creditors are paid, and any remaining cash is distributed to the partners. You Will Learn  two types of legal termination of a partnership.  how to liquidate a partnership. Liquidation of a Partnership SECTION 28.2

11 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  dissolution  liquidation Liquidation of a Partnership SECTION 28.2

12 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Ending a Partnership A partnership can be dissolved or liquidated to legally terminate. A dissolution occurs when partners change, but the partnership continues operations. A liquidation occurs when the business ceases to exist. The process involves four steps:dissolutionliquidation  Sell all noncash assets for cash.  Add all gains (or deduct all losses) resulting from the sale of noncash assets to or from the capital accounts of the partners based on the partnership agreement.  Pay all partnership creditors. Liquidation of a Partnership SECTION 28.2

13 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Ending a Partnership  After the creditors have been paid, any cash remaining should be distributed to the partners based on the final balance in their capital account. Liquidation of a Partnership SECTION 28.2

14 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Liquidating Surfside Bike & Skate Rentals View the balance sheet for the date the partners decided to dissolve Surfside Bike & Skate Rentals. Liquidation of a Partnership SECTION 28.2

15 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Liquidation of a Partnership SECTION 28.2

16 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Sale of Partnership Accounts Receivable at a Loss The following entry records the company’s sale of the receivables and loss distribution: Liquidation of a Partnership SECTION 28.2

17 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Sale of Partnership Merchandise at a Loss The following entry records the sale of the inventory and the distribution of the loss to the partners: Liquidation of a Partnership SECTION 28.2

18 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Sale of Partnership Equipment at a Gain The entry to record the sale of the equipment and distribution of the gain is as follows: Liquidation of a Partnership SECTION 28.2

19 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Payment of Partnership Liabilities The entry to record the payment of partnership liabilities is as follows: Liquidation of a Partnership SECTION 28.2

20 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Final Distribution of Cash The final transaction to end the partnership is recorded as follows: Liquidation of a Partnership SECTION 28.2

21 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  dissolution A legal change to the partnership such as a change in partners that does not generally affect the operations of the business.  liquidation When the business ceases to exist and dissolution is complete, all partnership assets are converted to cash, all debts are paid, and any remaining cash is distributed to the individual partners. Liquidation of a Partnership SECTION 28.2

22 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 1 On December 31, the partnership of Douglas and Allen, which shares gains and losses equally, sold a piece of equipment for $66,000. The equipment had cost $78,000 to purchase. To date, it had accumulated depreciation of $16,000. Complete the process to journalize this transaction. Chapter 28 Review CHAPTER 28

23 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 1 Step 1: Compute the book value of the equipment. $78,000 - $16,000 = $62,000 Step 2: Calculate the gain or loss generated by the sale. $66,000 - $62,000 = $4,000 gain Step 3: Calculate each partner’s share. $4,000 ÷ 2 = $2,000 Step 4: Which account(s) is (are) debited? For what amount? Debit Accumulated Depreciation-Equipment for $16,000. Debit Cash in Bank for $66,000. Step 5: Which account(s) is (are) credited? For what amount? Credit Douglas, Capital for $2,000. Credit Allen, Capital for $2,000. Credit Equipment for $78,000. Chapter 28 Review CHAPTER 28

24 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 2 If a partnership divides profits equally, how could the partners’ capital accounts have different balances? Chapter 28 Review CHAPTER 28

25 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 2 Answers will vary and might include:  One or more partners may have invested additional capital in the business.  One or more partners may have withdrawn different amounts during the life of the partnership. Chapter 28 Review CHAPTER 28

26 Glencoe Accounting Unit 6 Chapter 28 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Resources Glencoe Accounting Online Learning Center English Glossary Spanish Glossary