Adapted by Sheila Elworthy

Adapted by Sheila Elworthy
Neta PowerPoint presentations to accompany Volume 2 Accounting Second Canadian Edition by Warren/Reeve/Duchac/Elworthy/Kristjanson/Tober Adapted by Sheila Elworthy and Tana Kristjanson Copyright © 2014 by Nelson Education Ltd.

Accounting for Partnerships
Chapter 11 Accounting for Partnerships Copyright © 2014 by Nelson Education Ltd.

Describe the characteristics of proprietorships and partnerships. Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership. Copyright © 2014 by Nelson Education Ltd.

Describe and illustrate the accounting for partner admission and withdrawal. Describe and illustrate the accounting for liquidating a partnership. Prepare the statement of changes in partnership equity. Copyright © 2014 by Nelson Education Ltd.

Three Most Common Legal Forms of Business
Proprietorship Partnership Corporation Copyright © 2014 by Nelson Education Ltd.

Characteristics of a Proprietorship
Simple to form No limitation on legal liability Not taxable Limited life Limited ability to raise capital (funds) Ownership rights are difficult to transfer. Payments to owners are Withdrawals. Copyright © 2014 by Nelson Education Ltd.

General Partnerships A partnership is an association of two or more individuals who own and manage a company for profit. Less widely used than proprietorships. Copyright © 2014 by Nelson Education Ltd.

Characteristics of a Partnership
Moderately complicated to form No limitation on legal liability Not taxable Limited life Limited ability to raise capital (funds) Ownership rights are not easily transferable. Payments to owners are Withdrawals. Copyright © 2014 by Nelson Education Ltd.

Unique Aspects of a Partnership
Co-ownership of partnership property Mutual agency Participation in income Copyright © 2014 by Nelson Education Ltd.

Forms of Partnership In Canada, a partnership may take three forms:
General partnership (as previously described) Limited partnership Limited liability partnership (LLP) The accounting for all three is the same. Copyright © 2014 by Nelson Education Ltd.

Limited Partnership A limited partnership offers limited liability to partners who in most cases provide some funding but are not involved in the day-to-day operations of the partnership. At least one general partner operates the partnership and has unlimited liability. The remaining partners are considered limited partners. Copyright © 2014 by Nelson Education Ltd.

Limited Liability Partnership (LLP)
A limited liability company (LLP) protects partners from malpractice or negligence claims caused by work of one of their partners. While all partners are still liable for other partnership debts, debts that arise due to specific work of a partner are paid by that partner personally. Copyright © 2014 by Nelson Education Ltd.

Corporations A corporation is a legal entity that is distinct and separate from the individuals who create and operate it. As a legal entity, a corporation may acquire, own, and dispose of property in its own name, incur debts and enter into contracts, and sell shares of ownership. Copyright © 2014 by Nelson Education Ltd.

Forming a Partnership Lara Greguric and Mike Belfry agree to combine their hardware businesses in a partnership. Each is to contribute certain amounts of cash and other assets. They also agree that the partnership is to assume the liabilities of the separate businesses. Copyright © 2014 by Nelson Education Ltd.

Forming a Partnership In each entry, the noncash assets are recorded at values agreed upon by the partners. These values normally represent current market values. Copyright © 2014 by Nelson Education Ltd.

Forming a Partnership To illustrate, store equipment contributed by Belfry has a carrying value of $22,000 but the partners agreed that its market value is $19,300. They also agree that some of Belfry’s inventory is old and the $12,500 amount listed is overvalued by $1,500. Copyright © 2014 by Nelson Education Ltd.

EXAMPLE EXERCISE 11-1 Journalize Partners’ Original Investment Reese Howell and Shelley Baker decided to form a partnership. Reese Howell contributed equipment, inventory, and $34,000 cash. The equipment had a carrying value of $23,000 and a market value of $29,000. The inventory had a carrying value of $60,000, but had a market value of only $15,000 because of obsolescence. The partnership also assumed a $12,000 note payable owed by Howell that was used originally to purchase the equipment. Copyright © 2014 by Nelson Education Ltd.

EXAMPLE EXERCISE 11-1 Journalize Partners’ Original Investment Baker contributed equipment, inventory, and $8,000 cash to the partnership. The equipment had a carrying value of $33,000 and a market value of $18,000. The inventory had a market value of $40,000. Provide the journal entries for Howell’s and Baker’s contributions to the partnership. Copyright © 2014 by Nelson Education Ltd.

Dividing Income Income or losses of partnership are divided equally if no partnership agreement exists or the partnership agreement does not specify how the division is to occur. Copyright © 2014 by Nelson Education Ltd.

Dividing Income—Services of Partners
The partnership agreement of Lara Greguric and Mike Belfry provides for: 60% of any remaining net income is paid to Greguric, and 40% to Belfry. The firm had a net income of $150,000 for the year. Copyright © 2014 by Nelson Education Ltd.

Withdrawals If Greguric and Belfry withdraw funds from the partnership throughout the year, the withdrawals are debited to their withdrawal accounts. At the end of the year, the withdrawal account debit balances are closed to the partners’ capital accounts. Copyright © 2014 by Nelson Education Ltd.

EXAMPLE EXERCISE 11-2 Dividing Partnership Net Income—Closing Entries John Lee and Brett Young’s partnership agreement provided a salary allowance of $80,000 and $75,000 to each partner, respectively, with any remaining net income to be divided equally. During the year, both partners withdrew $6,000 per month. Determine the division of $200,000 net income for the year. Provide journal entries to close (1) the Income Summary account and (2) the withdrawals accounts for the two partners. Copyright © 2014 by Nelson Education Ltd.

Dividing Income—Services of Partners and Investments
The partnership agreement for Greguric and Belfry divides income as follows: Monthly salary allowance of $5,000 for Greguric and $4,000 for Belfry. Interest of 3% on each partner’s capital balance on January 1. Remaining income: 60% to Greguric, 40% to Belfry. Copyright © 2014 by Nelson Education Ltd.

Each partners’ annual salary is calculated.
$5,000 × 12 $4,000 × 12 Copyright © 2014 by Nelson Education Ltd.

Interest on each partner’s January 1 capital balance is determined.
3% × Greguric’s capital account balance on Jan. 1 of $56,200 Copyright © 2014 by Nelson Education Ltd.

The remaining income is divided 60% to Greguric, 40% to Belfry.

EXAMPLE EXERCISE 11-3 Dividing Partnership Net Income Sarah Stephen and Xavier Williams formed a partnership, dividing income as follows: Annual salary allowance to Stephen of $42,000. Interest of 4% on each partner’s capital balance on January 1. Any remaining net income will be shared by Stephen and Williams in a ratio of 1:3. Copyright © 2014 by Nelson Education Ltd.

EXAMPLE EXERCISE 11-3 Dividing Partnership Net Income Stephen and Williams had $20,000 and $150,000 in their January 1 capital balances, respectively. Net income for the year was $240,000. How much net income should be distributed to Williams? Copyright © 2014 by Nelson Education Ltd.

Dividing Income—Allowances Exceed Net Income
Assume the same facts as before for Greguric and Belfry, except that the net income is only $100,000. The total of the salary ($108,000) and interest ($2,790) is $110,790. In this case, the total of the allowance exceeds the net income by $10,790. Copyright © 2014 by Nelson Education Ltd.

Net income of $100,000 is divided.
This amount exceeds net income by $10,790. Copyright © 2014 by Nelson Education Ltd.

The entry for closing Income Summary and dividing net income:

EXAMPLE EXERCISE 11-4 Dividing Partnership Net Income—Allowances Exceed Net Income Use the information supplied in EE 11-3 for Sarah Stephen and Xavier Williams, except for net income. Assume the partnership had net income for the year of $40,000, instead of $240,000. How much net income should be distributed to Stephen? Prepare the journal entry to close the Income Summary account. Copyright © 2014 by Nelson Education Ltd.

Dividing Income in Event of Net Loss
Assume the same facts as before for Greguric and Belfry, except that the net loss is $7,000. The total of the salary ($108,000) and interest ($2,790) is $110,790. In this case, the total of the allowance exceeds the net income by $117,790. Copyright © 2014 by Nelson Education Ltd.

The entry for closing Income Summary and dividing net income:

EXAMPLE EXERCISE 11-5 Dividing Partnership Net Income in Event of Net Loss Use the information supplied in EE 11-3 for Sarah Stephen and Xavier Williams, except for net income. Assume the partnership had a net loss for the year of $30,000, instead of net income of $240,000. How much net income should be distributed to Stephen? Prepare the journal entry to close the Income Summary account. Copyright © 2014 by Nelson Education Ltd.

Admitting a Partner A person may be admitted to a partnership only with the consent of all the current partners by: Purchasing an interest from one or more of the current partners. Contributing assets to the partnership. Copyright © 2014 by Nelson Education Ltd.

Purchasing an Interest in a Partnership
Partners Lara Greguric and Mike Belfry have capital balances of $80,000 and $56,000, respectively. On June 1, each sells one-fifth of their equity to Marion Coome for $27,200 in cash. Copyright © 2014 by Nelson Education Ltd.

The only entry required in the partnership accounts is as follows:

Contributing Assets to a Partnership
Partners Lara Greguric and Mike Belfry each have capital balances of $80,000 and $56,000, respectively. On June 1, Marion Coome contributes $27,200 cash to Dundas Hardware for ownership equity of $27,200. Copyright © 2014 by Nelson Education Ltd.

The entry to record this transaction is as follows:

Revaluation of Assets If the asset accounts do not reflect approximate current market values when a new partner is admitted, the accounts should be adjusted (increased or decreased) before the new partner is admitted. Copyright © 2014 by Nelson Education Ltd.

The carrying value of accounts receivable for Dundas Hardware is $24,000. The partners feel the allowance should be increased by $3,000. The revaluation is recorded as follows: Copyright © 2014 by Nelson Education Ltd.

EXAMPLE EXERCISE 11-6 Revaluing and Contributing Assets to a Partnership Blake Nelson invested $45,000 in the Lawrence & Kerry partnership for ownership equity of $45,000. Prior to the investment, land was revalued to a market value of $260,000 from a carrying value of $200,000. Lynne Lawrence and Tim Kerry share net income in a 1:2 ratio. Provide the journal entry for the revaluation of land. Provide the journal entry to admit Nelson. Copyright © 2014 by Nelson Education Ltd.

On June 1, the partnership of Greguric and Belfry admit Marion Coome as a new partner. The assets of the old partnership are adjusted to current market values and the resulting capital balances for Greguric and Belfry are $78,200 and $54,800, respectively. Copyright © 2014 by Nelson Education Ltd.

Assume Greguric and Belfry agree to admit Coome as a partner for $33,250. In return, Coome will receive a one-fifth equity in the partnership and income allocation to Greguric, Belfry, and Coome will be 50%, 30%, and 20%, respectively. Copyright © 2014 by Nelson Education Ltd.

To record the admission of Coome to the partnership is as follows:

Bonus to Existing Partners
The capital balances for Greguric and Belfry are $78,200 and $54,800, respectively. Copyright © 2014 by Nelson Education Ltd.

Assume that on June 1, Greguric and Belfry agree to admit Coome as a partner for $40,000. In return, Coome will receive a one-fifth equity in the partnership and income allocation to Greguric, Belfry, and Coome will be 50%, 30%, and 20%, respectively. Copyright © 2014 by Nelson Education Ltd.

The bonus paid by Coome increases Greguric’s and Belfry’s capital accounts. It is distributed to the capital accounts of Greguric and Belfry according to their income-sharing ratio of 60% and 40%. Copyright © 2014 by Nelson Education Ltd.

Bonus to Admitted Partners
Existing partners may also agree to pay the new partner a bonus to join a partnership. Assume Greguric and Belfry agree to admit Coome as a partner for $25,000. In return, Coome will receive a one-fifth equity in the partnership and a 20% share in partnership income or losses. Copyright © 2014 by Nelson Education Ltd.

Bonus to Admitted Partner

The bonus paid to Coome decreases Greguric’s and Belfry’s capital accounts. It is distributed to the capital accounts of Greguric and Belfry according to their income-sharing ratio of 60% and 40%, respectively. Copyright © 2014 by Nelson Education Ltd.

EXAMPLE EXERCISE 11-7 Partner Bonus Lowman has a capital balance of $45,000 after adjusting assets to fair market value. Conrad contributes $26,000 to receive a 30% interest in a new partnership with Lowman. Determine the amount and recipient of the partner bonus. Copyright © 2014 by Nelson Education Ltd.

Withdrawal of a Partner
A partner may retire or withdraw from a partnership by: Selling their interest to existing partners. Selling their interest to the partnership. Copyright © 2014 by Nelson Education Ltd.

Selling an Interest to Existing Partners
On November 15, Lara Greguric decides to retire from the partnership. After the assets of the partnership are adjusted to current market values, the resulting capital balances are as follows: Copyright © 2014 by Nelson Education Ltd.

Selling an Interest to Existing Partners

Assume Belfry and Coome agree to each pay Greguric $40,000 for equal rights to her partnership share. This transaction is between Greguric, Belfry, and Coome. The only entry required by the partnership is to record the transfer of capital, as shown on the next slide. Copyright © 2014 by Nelson Education Ltd.

Selling an Interest to the Partnership
When a departing partner sells their interest to the partnership, the total assets and the total partners’ equity is decreased. Selling an interest to the partnership can result in: No bonus paid A bonus to the remaining partners A bonus paid to the retiring partners Copyright © 2014 by Nelson Education Ltd.

In this case, a bonus is being paid to the remaining partners. The bonus is split over the remaining partners’ shares. Belfry will receive 30/50ths of the bonus (30/(30% + 20%)) and Coome will receive 20/50ths (20/(20% + 30%)) of the bonus. Copyright © 2014 by Nelson Education Ltd.

Bonus to Retiring Partner
Assume the same capital balances prior to Greguric retirement: The partnership is willing to pay $90,000 upon Greguric’ retirement. Copyright © 2014 by Nelson Education Ltd.

Death of a Partner When a partner dies, the partnership accounts should be closed as of the date of death. The net income for the current period should then be determined and divided among the partners’ capital accounts. Copyright © 2014 by Nelson Education Ltd.

EXAMPLE EXERCISE 11-8 Withdrawal of Partner with Bonus On June 30, Joanne Kyne decided to retire from the partnership of Wilson, Kyne, Rose, and Jack. The partnership decided to buy her out. After the assets of the partnership had been adjusted to current market values, the capital balances of Wilson, Kyne, Rose, and Jack were $112,000, $80,000, $60,000, and $80,000, respectively. Prepare the journal entry to record Kyne’s retirement, assuming Kyne accepts payment of $83,000 and the partners shared net income and losses equally. Copyright © 2014 by Nelson Education Ltd.

Liquidation Process Sell the partnership assets. Divide any gains or losses from sale of assets to the partners’ capital accounts based on their income-sharing ratio. Pay the claims of creditors using the cash from step 1. Distribute the remaining cash to the partners based on the balances in their capital accounts. Copyright © 2014 by Nelson Education Ltd.

Liquidation Process Greguric, Belfry, and Coome decide to liquidate their partnership. On April 9, after discontinuing operations, the firm had the following trial balance. Copyright © 2014 by Nelson Education Ltd.

Gain on Sale of Assets On April 12, Greguric, Belfry, and Coome sell all noncash assets for $160,000. Thus, a gain of $7,600 ($160,000 – ($28,400 + $66,000 + $75,000 – $17,000)) is realized. Copyright © 2014 by Nelson Education Ltd.

Step 2: Division of the Gain
The gain is allocated to Greguric, Belfry, and Coome in the income-sharing ratio of 5:3:2. Thus, the partner capital accounts are credited as follows: Greguric $3,800 ($7,600 × 50%) Belfry $2,280 ($7,600 × 30%) Coome $1,520 ($7,600 × 20%) Copyright © 2014 by Nelson Education Ltd.

Step 2: Division of the Gain

Step 3: Payment of Liabilities

Step 4: Distribution of Cash to Partners
The remaining cash of $160,600 is distributed to the partners based on the balances in their capital accounts. The income-sharing ratio should not be used as a basis for distributing the cash to partners. Copyright © 2014 by Nelson Education Ltd.

Loss on Sale of Assets Greguric, Belfry, and Coome sell all noncash assets for 140,000. A loss of $12,400 ($140,000 – ($28,400 + $66,000 + $75,000 – $17,000)) is realized. The loss is distributed to Greguric, Belfry, and Coome in the income-sharing ratio of 5:3:2. Copyright © 2014 by Nelson Education Ltd.

Step 2: Division of the Loss

EXAMPLE EXERCISE 11-9 Liquidating Partnerships Prior to liquidating their partnership, Todd and Gentry had capital accounts of $150,000 and $50,000, respectively, noncash assets of $220,000, and liabilities of $20,000. Todd and Gentry share income and loss in a ratio of 5:3. The assets of the partnership were sold for $200,000. Determine the amounts received by Todd and Gentry as a final distribution from the liquidation of the partnership. Copyright © 2014 by Nelson Education Ltd.

Loss on Sale of Assets—Capital Deficiency
Greguric, Belfry, and Coome sell all of the noncash assets for $12,400. A loss of $140,000 ($12,400 – ($28,400 + $66,000 + $75,000 – $17,000)) is realized. The share of the loss allocated to Coome, $28,000 (20% of $140,000), exceeds the $25,800 balance in her capital account. Coome contributes $2,200 to the partnership. Copyright © 2014 by Nelson Education Ltd.

Partner Does Not Pay Deficiency
If Coome does not pay her deficiency, the deficiency would be allocated to Greguric and Belfry based on their income-sharing ratio of 3:2. The remaining cash would be distributed to Greguric and Belfry as shown on the next slide. Copyright © 2014 by Nelson Education Ltd.

Partner Does Not Pay Deficiency

Allocation of Deficiency

Distribution of Cash to Partners

EXAMPLE EXERCISE 11-10 Liquidating Partnerships—Deficiency Prior to liquidating their partnership, Short and Bain had capital accounts of $20,000 and $80,000, respectively, noncash assets of $110,000, and $10,000 of liabilities. Short and Bain share income and loss equally. The assets were sold for $40,000. Determine the amount of Short’s deficiency. Determine the amount distributed to Bain, assuming Short is unable to satisfy the deficiency. Copyright © 2014 by Nelson Education Ltd.

Statement of Changes in Partnership Equity
The change in the owners’ capital accounts for a period of time is reported in a statement of changes in partnership equity. Copyright © 2014 by Nelson Education Ltd.

Adapted by Sheila Elworthy

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