Chapter 13 Partnerships and Limited Liability Corporations Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives Describe the basic characteristics of After studying proprietorships, After corporations, studying this this partnerships, and limitedchapter, liability corporation you chapter, you should should Describe and illustrate the equity reporting be able to: be able to: for proprietorships, corporations, partnerships, and limited liability corporations Describe and illustrate the accounting for forming a partnership Objectives Objectives Describe and illustrate the accounting for dividing the net income and net loss of a partnership Describe and illustrate the accounting for the dissolution of a partnership Describe and illustrate the accounting for liquidation of a partnership Describe the lifecycle of a business, including the role of venture capitalists, initial public offerings, and underwriters Alternative Alternative Forms Forms of of Business Business Entities Entities Advantages A A proprietorship proprietorship isis owned owned by by one one individual individual Joe’s Review Review of of Chapter Chapter11 • Ease in organizing • Low cost of organizing Disadvantages • Difficulty in raising large amounts of capital • Unlimited liability Alternative Alternative Forms Forms of of Business Business Entities Entities A A corporation corporation isis organized organized under under state state or or federal federal statutes statutes as as aa separate separate legal legal entity entity J & M, Inc Advantages • The ability to obtain large amounts of resources by issuing stocks • Limited liability for the owners Disadvantages • Double taxation • More complexity and regulations Alternative Alternative Forms Forms of of Business Business Entities Entities J & M, Inc A A business business may may organize organize as as an an SS Corporation Corporation The The IRS IRS allows allows income income to to pass pass through through the the SS Corporation Corporation to to the the individual individual stockholder stockholder without without the the corporation corporation having having to to pay pay tax tax on on the the income income Alternative Alternative Forms Forms of of Business Business Entities Entities A A partnership partnership isis an an association association of of two two or or more more individuals individuals Joe and Marty’s Advantages • More financial resources than a proprietorship • Additional management skills Alternative Alternative Forms Forms of of Business Business Entities Entities A A partnership partnership isis an an association association of of two two or or more more individuals individuals Joe and Marty’s • • • • Disadvantages Limited life Unlimited liability Co-ownership of partnership property Mutual agency Alternative Alternative Forms Forms of of Business Business Entities Entities An An important important right right of of partners partners isis to to participate participate in in the the income income of of the the partnership partnership Liquidating Liquidating Partnerships Partnerships Loss Loss on on Realization Realization The The liabilities liabilities of of the the partnership partnership are are paid, paid, $9,000 $9,000 Liquidating Liquidating Partnerships Partnerships Balance before realization $9,000 Sale of assets and division of loss — Balance after realization Payment of liabilities $9,000 –9,000 Noncash Cash Assets Liabilities $11,000 $64,000 +44,000 –64,000 $55,000 — $ –9,000 Left side of statement Liquidating Liquidating Partnerships Partnerships Balance before realization $9,000 Sale of assets and division of loss — Balance after realization Payment of liabilities $9,000 –9,000 Balance after payment $ Noncash Cash Assets Liabilities $11,000 $64,000 +44,000 –64,000 $55,000 –9,000 $ — $46,000 $ Left side of statement Liquidating Liquidating Partnerships Partnerships Loss Loss on on Realization Realization The The remaining remaining cash, cash, $46,000, $46,000, isis paid paid to to each each partner partner in in accordance accordance with with the the partner’s partner’s capital capital balance balance Liquidating Liquidating Partnerships Partnerships Noncash Cash Assets Liabilities $11,000 $64,000 Balance before realization $9,000 Sale of assets and division of loss +44,000 — Balance after realization $55,000 Payment of liabilities –9,000 $9,000 –9,000 Balance after $46,000 Partners’ cashpayment distributed –46,000 $ —0 Final balances $ Left side of statement $ –64,000 $ — $ — $ Liquidating Liquidating Partnerships Partnerships Farley Capital Greene Hall Capital Capital $22,000 $22,000 Balance before realization $22,000 Sale of assets and division of loss –10,000 –6,000 – 4,000 Balance after realization $12,000 $16,000 $18,000 Partners’ cash distributed –12,000 Payment of liabilities — –16,000 — – 18,000 — Final balances $$12,000 $$16,0000 $ Balance after payment Right side of statement $18,000 Liquidating Liquidating Partnerships Partnerships Sale Sale of of Assets Assets Apr 00 30 Loss on Realization Noncash Assets 64 000 00 Cash 44 000 20 000 00 Liquidating Liquidating Partnerships Partnerships Division Division of of Loss Loss Apr 30 Jean Farley, Capital 00 Brad Greene, Capital Alice Hall, Capital Loss on Realization 20 000 00 10 000 000 00 000 00 Liquidating Liquidating Partnerships Partnerships Payment Payment of of Liabilities Liabilities Apr 30 000 00 Liabilities Cash 000 00 Liquidating Liquidating Partnerships Partnerships Distribution Distribution to to Partners Partners Apr 30 Capital 12 000 00 Jean Farley, Brad Greene, Capital 16 000 00 Alice Hall, Capital Cash 46 000 00 18 000 00 Lifecycle Lifecycle of of aa Business Business Business Stage Principal Advantage Form easily: Jacobi forms a Della’s Delights, business by obtaining a Proprietorship local business license and Jeff Jacobi, Proprietor opening a bank account Della’s Delights, Partnership Jacobi and Lange, Partners Expand capital and expertise: Jacobi admits a new partner that contributes capital and expertise Continued Lifecycle Lifecycle of of aa Business Business Business Stage Principal Advantage Della’s Delights, LLC Limit legal liability: The partnership is changed to an LLC to limit legal liability of owners Della’s Delights, Inc Simplify raising capital: The LLC is changed to a corporation to raise capital from the public Continued Lifecycle Lifecycle of of aa Business Business Business Stage Principal Advantage Della’s Delights, Inc a Provide exit: The company division of International is sold for cash Foods, Inc A A venture venture capitalist capitalist isis an an individual individual or or firm firm that that provides provides equity equity financing financing for for aa new new company company Chapter 13 The The End End ... the accounting for forming a partnership Objectives Objectives Describe and illustrate the accounting for dividing the net income and net loss of a partnership Describe and illustrate the accounting. .. proprietorships, After corporations, studying this this partnerships, and limitedchapter, liability corporation you chapter, you should should Describe and illustrate the equity reporting be able... proprietorship isis owned owned by by one one individual individual Joe’s Review Review of of Chapter Chapter11 • Ease in organizing • Low cost of organizing Disadvantages • Difficulty in raising