Partnerships Chapter 18

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

– a binding legal agreement The Uniform Partnership Act provides the legal background. The Uniform Partnership Act provides the legal background. – an informal agreement – easy to form Partnerships

Partnership agreements should be in writing to avoid future conflicts and misunderstanding. Learning Unit 18-1

Learning Unit 18-1 – profit and loss sharing agreements – share of workload – provisions for admission to and withdrawal from a partnership – separate capital and withdrawals account for each partner

Learning Unit 18-1 Limited life: n When a partner dies, leaves, or a new partner is admitted, the partnership legally ends. Mutual agency: n The actions of one partner are binding on all the other partners.

Learning Unit 18-1 Unlimited liability: n General partners’ personal assets are at risk. Co-ownership of property: n All partners share the business assets.

Learning Unit 18-1 n On June 1, 200x, Jane Reedy and Bill Burr enter into a partnership. n Reedy invests $9,000 cash plus store equipment worth $25,000 with accumulated depreciation of $5,000. n The current appraised value of the equipment is $28,000.

Learning Unit 18-1 n Reedy also invested Accounts Receivable of $2,000 with an Allowance for Doubtful Accounts of $500. n The partnership will take on the responsibility for a $6,000 note issued by Reedy. n Burr invests $20,000 cash. n What are the journal entries?

June 1, 200x Cash 9,000 Accounts Receivable 2,000 Equipment28,000 Allowance for Doubtful Accounts 500 Note Payable 6,000 J. Reedy Capital32,500 June 1, 200x Cash 9,000 Accounts Receivable 2,000 Equipment28,000 Allowance for Doubtful Accounts 500 Note Payable 6,000 J. Reedy Capital32,500 Learning Unit 18-1

June 1, 200x Cash20,000 B. Burr, Capital20,000 June 1, 200x Cash20,000 B. Burr, Capital20,000 Learning Unit 18-1

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

Learning Unit 18-2 n How do partners share profit and losses? – equally – salary allowance – interest allowance – ratio based on investment – capital contribution

Learning Unit 18-2 Reedy and Burr agreed to split profit and losses as follows: n 60% to Reedy and 40% to Burr How do we allocate $80,000 net income for the year? n $80,000 × 60% = $48,000 n $80,000 × 40% = $32,000

December 31, 200x Income Summary80,000 Reedy, Capital48,000 Burr, Capital32,000 December 31, 200x Income Summary80,000 Reedy, Capital48,000 Burr, Capital32,000 Learning Unit 18-2

Learning Unit 18-2 Reedy and Burr agreed to split profit and losses as follows: n A salary allowance of $10,000 to Reedy and $15,000 to Burr will be paid. n Ten percent interest on each partner’s capital investment will be paid annually. n Any remaining net income or loss will be shared equally.

Reedy Burr First 25,000 based on salary$10,000$15,000 Sharing based on capital 3,250 2,000 Remainder shared equally 24,875 24,875 Total$38,125$41,875 $80,000 Reedy Burr First 25,000 based on salary$10,000$15,000 Sharing based on capital 3,250 2,000 Remainder shared equally 24,875 24,875 Total$38,125$41,875 $80,000 Learning Unit 18-2

Preparing a statement of partners’ equity. Learning Objective 3

Learning Unit 18-2 n Partnership statement of owner’s equity is much like those of a proprietorship. n The statement of owner’s equity shows additional investments by partner. n It also shows drawings by partner.

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

Learning Unit 18-3 Buying an equity interest from an original partner: n Cash is exchanged outside of the business and doesn’t affect partnership assets. n The capital balance is transferred to the new partner.

Learning Unit 18-3 Assume that B. Burr sells his interest to Mr. Mix. November 1, 200x B. Burr, Capital10,000 Mix, Capital10,000 November 1, 200x B. Burr, Capital10,000 Mix, Capital10,000

Learning Unit 18-3 Investing in an existing partnership: n Cash is paid to the partnership. n Bonus is to the old partners when more is paid than the interest acquired. n Bonus is to the new partner when less is paid than the interest acquired. n New partner’s capital account is set up.

Learning Unit 18-3 Withdrawal of a partner: n Assets are adjusted to fair market value. n Any gain or loss in the revaluation is shared according to the partners’ profit and loss ratio. n 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 and preparing a statement of liquidation. Learning Objective 5

Learning Unit 18-4 The following steps complete liquidation: n Assets are sold for cash. n Any loss or gain is divided among the partners. n Creditors are paid off. n Any remaining cash is distributed to the partners.

End of Chapter 18