1. Partnerships
Chapter 17 2

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

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

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

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

6. 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.

7. 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?

8. Learning Unit 17-1 (Partnership Characteristics)
June 1, 20xx
Cash ,000
Accounts Receivable 2,000
Equipment ,000
Allowance for Doubtful Accounts
Note Payable ,000
J. Reedy, Capital ,500
June 1, 20xx
Cash ,000
B. Burr, Capital ,000

9. 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

10. 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

11. 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.

12. 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 ,100
Brown, Capital ,100

13. 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 ,000 ÷ 18,000 × 24,300 = $ 8,100
Brown ,000 ÷ 18,000 × 24,300 = $ 5,400
Total $18, $24,300

14. 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.

15. 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,
.10 × $6,
.10 × $4,
Total interest allowance ,800
Total salary and interest $6,800 $6,600 $9,400 $22,800
c. Net income $24,300
Less ,800
Equals $ 1,500 ÷
Share of net income $7,300 $7,100 $9,900 $24,300

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

17. 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.

18. 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 , , ,900
Totals $15,300 $13,100 $13,900
Less: Withdrawals , , ,000
Capital balances, Dec. 31, 20xx $11,300 $ 8,100 $ 5,900

19. 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

20. 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

21. Learning Unit 17-3 (Recording Admissions and Withdrawing)
Assets
Cash $ 5,000
Other assets ,000
Total assets $12,000
Partners’ Equity
Jones, Capital $ 6,000
Ryan, Capital ,000
Total equities $12,000
Jones and Ryan 11

22. 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 ,000

23. 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.

24. 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.

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

26. 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.

27. End of Chapter 17