Financial accounting 3e IFRS edtion willey appendix b

WILEY IFRS EDITION Prepared by Coby Harmon University of California, Santa Barbara F-1 Westmont College APPENDIX PREVIEW In this appendix, we discuss reasons why businesses select the partnership form of organization We also explain the major issues in accounting for partnerships Financial Accounting IFRS 3rd Edition Weygandt ● Kimmel ● Kieso F-2 APPENDIX F Accounting for Partnerships LEARNING OBJECTIVES After studying this chapter, you should be able to: F-3 Identify the characteristics of the partnership form of business organization Explain the accounting entries for the formation of a partnership Identify the bases for dividing net income or net loss Describe the form and content of partnership financial statements Explain the effects of the entries to record the liquidation of a partnership Partnership Form of Organization Learning Objective Partnership: An association of two or more persons to carry on as co- Identify the characteristics of the partnership form of business organization owners of a business for profit Type of Business: F-4  Small retail, service, or manufacturing companies  Accountants, lawyers, and doctors LO Characteristics of Partnerships ASSOCIATION OF INDIVIDUALS  Legal entity  Accounting entity  Net income not taxed as a separate entity MUTUAL AGENCY  Act of any partner is binding on all other partners, so long as the act appears to be appropriate for the partnership F-5 LO Characteristics of Partnerships LIMITED LIFE  Dissolution occurs whenever a partner withdraws or a new partner is admitted  Dissolution does not mean the business ends UNLIMITED LIABILITY  F-6 Each partner is personally and individually liable for all partnership liabilities LO Characteristics of Partnerships CO-OWNERSHIP OF PROPERTY  Each partner has a claim on total assets  This claim does not attach to specific assets  All net income or net loss is shared equally by the partners, unless otherwise stated in the partnership agreement F-7 LO Organizations with Partnership Characteristics Special partnership forms are: LIMITED PARTNERSHIPS, LIMITED LIABILITY PARTNERSHIPS, LIMITED LIABILITY COMPANIES, and “S” CORPORATIONS Illustration F-2 Advantages and disadvantages of a partnership F-8 LO The Partnership Agreement Should specify relationships among the partners: F-9 Names and capital contributions of partners Rights and duties of partners Basis for sharing net income or net loss Provision for withdrawals of assets Procedures for submitting disputes to arbitration Procedures for the withdrawal or addition of a partner Rights and duties of surviving partners in the event of a partner’s death LO Basic Partnership Accounting Learning Objective Forming a Partnership Explain the accounting entries for the formation of a partnership Illustration: A Rolfe and T Shea combine their proprietorships to start a partnership named U.K Software The firm will specialize in developing financial modeling software packages Rolfe and Shea have the following assets prior to the formation of the partnership Illustration F-3 F-10 Book and fair values of assets invested LO Liquidation of a Partnership Learning Objective Ends both the legal and economic life of the entity Explain the effects of the entries to record the liquidation of a partnership In liquidation, sale of non-cash assets for cash is called realization To liquidate, it is necessary to: F-23 Sell non-cash assets for cash and recognize a gain or loss on realization Allocate gain/loss on realization to the partners based on their income ratios Pay partnership liabilities in cash Distribute remaining cash to partners on the basis of their capital balances LO Liquidation of a Partnership Illustration: Ace Company is liquidated when its ledger shows the assets, liabilities, and equity accounts are reported as follows: Illustration F-9 Account balances prior to liquidation F-24 LO Liquidation of a Partnership No Capital Deficiency Illustration: Ace Company agree to liquidate the partnership on the following terms (1) The non-cash assets of the partnership will be sold to Jackson Enterprises for €75,000 cash (2) The partnership will pay its partnership liabilities The income ratios of the partners are 3:2:1, respectively Step - Record the realization of noncash assets Cash 75,000 Accumulated Depreciation—Equipment 8,000 Accounts Receivable Inventory 18,000 Equipment 35,000 Gain on Realization F-25 15,000 15,000 LO No Capital Liquidation of a Partnership Deficiency Illustration: Ace Company agree to liquidate the partnership on the following terms (1) The non-cash assets of the partnership will be sold to Jackson Enterprises for €75,000 cash (2) The partnership will pay its partnership liabilities The income ratios of the partners are 3:2:1, respectively Step – Allocate the gain to the partners Gain on Realization F-26 15,000 R Arnet, Capital (€15,000 x 3/6) 7,500 P Carey, Capital (€15,000 x 2/6) 5,000 W Eaton, Capital (€15,000 x 1/6) 2,500 LO Liquidation of a Partnership No Capital Deficiency Illustration: Ace Company agree to liquidate the partnership on the following terms (1) The non-cash assets of the partnership will be sold to Jackson Enterprises for €75,000 cash (2) The partnership will pay its partnership liabilities The income ratios of the partners are 3:2:1, respectively Step – Creditors are paid in full Notes Payable 15,000 Accounts Payable 16,000 Cash F-27 31,000 LO Liquidation of a Partnership No Capital Deficiency Step – Record distribution of cash to the partners Illustration F-10 Ledger balances before distribution of cash R Arnet, Capital 22,500 P Carey, Capital 22,800 W Eaton, Capital 3,700 Cash 49,000 Caution: Cash should not be distributed to partners on the basis of their income-sharing ratios F-28 LO Liquidation of a Partnership No Capital Deficiency Some accountants prepare a SCHEDULE OF CASH PAYMENTS to determine the distribution of cash to the partners Illustration F-11 Schedule of cash payments, no capital deficiency F-29 LO Liquidation of a Partnership Capital Deficiency Illustration: Ace Company is on the brink of bankruptcy The partners decide to liquidate by having a “going-out-ofbusiness” sale Merchandise is sold at substantial discounts, and the equipment is sold at auction Cash proceeds from these sales and collections from customers total only €42,000 Step - Record the realization of non-cash assets Cash 42,000 Accumulated Depreciation—Equipment 8,000 Loss on Realization 18,000 Accounts Receivable F-30 Inventory 18,000 Equipment 35,000 15,000 LO Liquidation of a Partnership Capital Deficiency Illustration: Ace Company is on the brink of bankruptcy The partners decide to liquidate by having a “going-out-ofbusiness” sale Merchandise is sold at substantial discounts, and the equipment is sold at auction Cash proceeds from these sales and collections from customers total only €42,000 Step – Allocate the loss to the partners F-31 R Arnet, Capital (€18,000 x 3/6) 9,000 P Carey, Capital (€18,000 x 2/6) 6,000 W Eaton, Capital (€18,000 x 1/6) 3,000 Loss on Realization 18,000 LO Liquidation of a Partnership Capital Deficiency Illustration: Ace Company is on the brink of bankruptcy The partners decide to liquidate by having a “going-out-ofbusiness” sale Merchandise is sold at substantial discounts, and the equipment is sold at auction Cash proceeds from these sales and collections from customers total only €42,000 Step – Creditors are paid in full Notes Payable 15,000 Accounts Payable 16,000 Cash F-32 31,000 LO Liquidation of a Partnership Capital Deficiency Step – Record distribution of cash to the partners Illustration F-12 Ledger balances before distribution of cash The distribution of cash to the partners will vary depending on how Eaton’s deficiency is Deficiency settled PAYMENT OF DEFICIENCY Cash 1,800 W Eaton, Capital F-33 1,800 LO Liquidation of a Partnership Capital Deficiency PAYMENT OF DEFICIENCY Step – Record distribution of cash to the partners Illustration F-13 Ledger balances after paying capital deficiency R Arnet, Capital 6,000 P Carey, Capital 11,800 Cash F-34 17,800 LO Liquidation of a Partnership Capital Deficiency Step – Record distribution of cash to the partners Illustration F-12 Ledger balances before distribution of cash The distribution of cash to the partners will vary depending on how Eaton’s deficiency is Deficiency settled NON-PAYMENT OF DEFICIENCY R Arnet, Capital (€1,800 x 3/5) 1,080 P Carey, Capital (€1,800 x 2/5) 720 W Eaton, Capital F-35 1,800 LO Liquidation of a Partnership Capital Deficiency NON-PAYMENT OF DEFICIENCY Illustration F-14 Step – Record distribution of cash to the partners R Arnet, Capital 4,920 P Carey, Capital 11,080 Cash F-36 Ledger balances after nonpayment of capital deficiency 16,000 LO Copyright “Copyright © 2016 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” F-37 .. .APPENDIX PREVIEW In this appendix, we discuss reasons why businesses select the partnership form of organization We also explain the major issues in accounting for partnerships Financial Accounting. .. Financial Accounting IFRS 3rd Edition Weygandt ● Kimmel ● Kieso F-2 APPENDIX F Accounting for Partnerships LEARNING OBJECTIVES After studying this chapter, you should be able to: F-3 Identify... of business organization Explain the accounting entries for the formation of a partnership Identify the bases for dividing net income or net loss Describe the form and content of partnership financial