Partnerships Chapter 17 2

Journalizing the entry for formation of a partnership. Learning Objective 1 Journalizing the entry for formation of a partnership. 4

Learning Unit 17-1 (Partnership Characteristics) An informal agreement Easy to form A binding legal agreement The Uniform Partnership Act provides the legal background.

Learning Unit 17-1 (Partnership Characteristics) Partnership agreements should be in writing to avoid future conflicts and misunderstanding. 6

Learning Unit 17-1 (Partnership Characteristics) Limited life Mutual agency Unlimited liability Co-ownership of property Taxation 7

Learning Unit 17-1 (Partnership Characteristics) 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. The current appraised value of the equipment is $28,000.

Learning Unit 17-1 (Partnership Characteristics) 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. Burr invests $20,000 cash. What are the journal entries?

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

Calculating a partner’s share of net income based on Learning Objective 2 Calculating a partner’s share of net income based on fractional ratio, beginning capital investment, and salary and interest allowances. 4

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

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.

Learning Unit 17-2 (Division of Net Income or Net Loss) Situation 1 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

Learning Unit 17-2 (Division of Net Income or Net Loss) Situation 2 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

Learning Unit 17-2 (Division of Net Income or Net Loss) Situation 3 a. Annual salary allowance of $6,000 to Alexander, $6,000 to Sullivan, and $9,000 to Brown. b. Ten percent interest on each partner’s capital investment. c. Remaining net income or net loss shared equally.

Learning Unit 17-2 (Division of Net Income or Net Loss) Situation 3 Alexander Sullivan Brown Total 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

Learning Objective 3 Preparing a statement of partners’ equity. 4

Learning Unit 17-2 (Division of Net Income or Net Loss) A partnership statement of owner’s equity is much like that of a proprietorship. The statement of owner’s equity shows additional investments by partner. It also shows drawings by partner.

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

Journalizing entries to record admitting a new partner, Learning Objective 4 Journalizing entries to record admitting a new partner, withdrawal of a partner, and bonuses to partners. 4

Learning Unit 17-3 (Recording Admissions and Withdrawing) There are two ways to join a partnership. 1. Purchase an equity interest from one or more of the existing partners. 2. Make an investment into the business. 11

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 11

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

Learning Unit 17-3 (Recording Admissions and Withdrawing) Investing in an existing partnership: Cash is paid to the partnership. Bonus is to the old partners when more is paid than the interest acquired. Bonus is to the new partner when less is paid than the interest acquired. New partner’s capital account is set up.

Learning Unit 17-3 (Recording Admissions and Withdrawing) Withdrawal of a partner: Assets are adjusted to fair market value. Any gain or loss in the revaluation is shared according to the partners’ profit and loss ratio. A partner may withdraw according to an agreement that results in the partner leaving with more or less than book value.

Journalizing entries involved in the liquidation process Learning Objective 5 Journalizing entries involved in the liquidation process and preparing a statement of liquidation. 4

Learning Unit 17-4 (The Liquidation of a Partnership) Step 1 Assets are sold for cash. Step 2 Any loss or gain is divided among the partners. Step 3 Creditors are paid off. Step 4 Any remaining cash is distributed to the partners.

End of Chapter 17