Solution manual accounting 25th editon warren chapter 12

The partnership agreement partnership or operating agreement LLC establishes the income- sharing ratio among the partners members, amounts to be invested, and admission and withdrawal o

CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS AND

LIMITED LIABILITY COMPANIES

DISCUSSION QUESTIONS

1 a Proprietorship: Ease of formation and nontaxable entity.

b. Partnership: Expanded owner expertise and capital, nontaxable entity, and moderate

complexity of formation

c Limited liability company: Limited liability to owners, expanded access to capital,

nontaxable entity, and moderate complexity of formation.

2 The disadvantages of a partnership are that its life is limited, each partner has unlimited

liability, one partner can bind the partnership to contracts, and raising large amounts of capital is more difficult for a partnership than a limited liability company.

3 Yes A partnership may incur losses in excess of the total investment of all partners The

division of losses among the partners is made according to their agreement In addition, because

of the unlimited liability of each partner for partnership debts, a particular partner may

actually lose a greater amount than his or her capital balance.

4 The partnership agreement (partnership) or operating agreement (LLC) establishes the income-

sharing ratio among the partners (members), amounts to be invested, and admission and withdrawal of partners (members) In addition, for an LLC the operating agreement specifies

if the LLC is owner-managed or manager-managed.

5 No Maholic would have to bear his share of losses In the absence of any agreement as to

division of net income or net loss, his share would be one-third In addition, because of the unlimited liability of each partner, Maholic may have to bear more than one-third of the losses

if one partner is unable to absorb his share of the losses

6 Yes Partnership net income is divided according to the income-sharing ratio, regardless of

the amount of the withdrawals by the partners Therefore, it is very likely that the partners’ monthly withdrawals from a partnership will not exactly equal their shares of net income.

7 a Debit the partner’s drawing account and credit Cash.

b No Payments to partners and the division of net income are separate The amount of one

does not affect the amount of the other

c Debit the income summary account for the amount of the net income and credit the

partners’ capital accounts for their respective shares of the net income

8 a By purchase of an interest, the capital interest of the new partner is obtained from the old

partner, and neither the total assets nor the total equity of the partnership is affected

b By investment, both the total assets and the total equity of the partnership are increased.

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DISCUSSION QUESTIONS (Continued)

9 It is important to state all partnership assets in terms of current prices at the time of the

admission of a new partner because failure to do so might result in participation by the new partner in gains or losses attributable to the period prior to admission to the partnership.

To illustrate, assume that A and B share net income and net loss equally and operate a

partnership that owns land recorded at and costing $20,000 C is admitted to the partnership, and the three partners share in income equally The day after C is admitted to the partnership, the land is sold for $35,000 and, since the land was not revalued, C receives a one-third

distribution of the $15,000 gain In this case, C participates in the gain attributable to the period prior to admission to the partnership.

10 A new partner who is expected to improve the fortunes (income) of the partnership, through

such things as reputation or skill, might be given equity in excess of the amount invested to join the partnership.

CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

12-2

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Distributed to Orr and Graham:

Remaining income……… 3,600 3 1,800 4 5,400 Total distributed to partners… $35,200 $10,800 $46,000

PE 12–2B

Distributed to Prado and Nicks:

Remaining income……… 35,250 35,250 3 70,500 Total distributed to partners… $36,250 $75,750 $112,000

($125,000 – $80,000) × 50%.

($30,000 + $22,500) × 50%.

($39,000 – $30,000) × 2/3.

PE 12–4A

Total equity after admitting Rodriguez……… $560,000

Rodriguez’s equity after admission……… $336,000

PE 12–4B

Marone’s contribution……… 25,000 Total equity after admitting Marone……… $100,000

Marone’s contribution……… 25,000 Bonus paid to Marone……… $ 15,000

PE 12–5A

Realization of asset sales……… $120,000

Book value of assets

($32,000 + $60,000 + $10,000)……… 102,000

Morgan’s share of gain (50% × $18,000)……… 9,000

PE 12–5B

Realization of asset sales……… $410,000

Book value of assets

($240,000 + $150,000 + $80,000)……… 470,000

PE 12–6A

Book value of assets*……… 430,000

b $30,000 ($245,000 – $200,000 share of loss – $15,000 Bonilla’s

deficiency; also equals the amount realized from asset sales)

efficient in generating revenues from its staff resources between

the two years.

is more efficient in generating revenues from its staff resources between the two years.

b Net income (3:1)……… $94,500 $31,500 $126,000

c Interest allowance……… $13,500 1 $ 4,500 2 $ 18,000 Remaining income (2:3)……… 43,200 64,800 108,000 Net income……… $56,700 $69,300 $126,000

Remainder (net loss, $40,000 plus $80,000

salary allowances) divided equally (60,000) (60,000) (120,000)

Net loss $ (15 ,000) $(25 ,000) $ (40 ,000)

Ex 12–6

a The partners can divide net income in any ratio that they wish However, in the

absence of an agreement, net income is divided equally between the partners.

Therefore, Wanda’s conclusion was correct, but for the wrong reasons In

addition, note that the monthly drawings have no impact on the division of

income These drawings are not the same as a salary allowance, which is part

of a formal income-sharing agreement.

b An income-sharing agreement could be designed to credit each partner’s capital account for his or her respective share of income For example, an income-sharing agreement could be designed to credit Wanda for interest on her capital

contribution, while a salary allowance could be designed to credit Ava for the greater effort she puts into the partnership After deducting for these items, the remaining income

could be divided equally.

Neel’s remaining income: ($112,000 – $75,000) × 3/5

Tate’s remaining income: ($112,000 – $75,000) × 2/5

b (1)

(2)

Note: The reduction in members’ equity from withdrawals would be disclosed

on the statement of members’ equity.

c If the net income of the LLC were less than the sum of the salary allowances,

both members would still be credited with their salary allowances From this

amount, each partner would deduct his or her share of the excess of the

total salary allowance over the net income Thus, the difference between the

net income and total salary allowances would be allocated to each partner as

a deduction, according to the income-sharing ratio.

Zachery Neel, Member Equity 45,000

Lauren Tate, Member Equity 30,000

Ex 12–8

a.

WLKT Partners Madison Sanders

Observer Newspaper, LLC,

2014

Madison Sanders, Member Equity* 59,000 Observer Newspaper, LLC,

Ex 12–8 (Concluded)

c.

d An income-sharing agreement provides flexibility and fairness Without an

income-sharing agreement, each member would be credited with an equal

proportion of the total earnings, or one-third each However, the members provide different capital and effort to the LLC WLKT is a large contributor of capital

(funds), while Madison Sanders is providing ongoing effort and expertise These separate contributions should be acknowledged in the income-sharing formula Thus, the agreement credits member equity for both interest on capital and a salary allowance for Sanders Any remaining income is credited to capital

according to a negotiated allocation, which in this case is not an equal amount

to each member.

MARVEL MEDIA, LLC Statement of Members’ Equity For the Year Ended December 31, 2014

WLKT Partners

Madison Sanders

Observer Newspaper,

d Partner drawings are not the same as a salary The drawings represent a

distribution of the profits of the partnership that has been credited to the

partners’ capital accounts In this case, the drawings occur during the year prior

to the final accounting for profit distribution Thus, the drawings could end up greater than the final partner net income If this were the case, the partner would

be liable to the partnership for returning the excess drawings over the income earned for the year.

Ex 12–10

a and b.

$207,000 × 1/3.

Note: The sale to Cross is not a transaction of the partnership, so the sales

price is not considered in this journal entry.

Ex 12–11 a.

(1)

(2)

b Aaron Garner, Capital ($180,000 – $36,000)……… $144,000

Ricardo Fernandez, Capital ($120,000 – $30,000)…… 90,000

Aaron Garner, Capital (20% × $180,000) 36,000

Ricardo Fernandez, Capital (25% × $120,000) 30,000

to admitting a new partner, the existing partners should realize the increase in the value of the land in their capital accounts prior to the new partner’s

admission Otherwise, the new partner would share in the increase in the

market value of the land.

Ex 12–13

a Bonus received by Solano:

Cody Jenkins, capital……… $ 72,000

Jun Ito, capital……… 38,000

Solano’s contribution……… 30,000

Total partners’ capital after admitting Solano… $140,000

Solano’s equity interest after admission………… × 30 %

Valeria Solano, capital……… $ 42,000

Solano’s contribution……… 30,000

Bonus paid to Solano……… $ 12,000

b.

c Apparently, Jenkins and Ito value the expertise offered by Solano Solano is able

to use the computer to design and render landscape designs It is likely that this type of skill is very useful for both selling and implementing landscape ideas Her skills can help the partnership sell ideas to clients by providing computer renderings of the designs In this way, a client can see the design on the

computer before agreeing to work In addition, the computer-aided landscapes provide materials plans, labor estimates, and other cost estimates for a particular design Thus, the partners may be better able to control their costs by using Solano’s skills Overall, they value her skills sufficiently to provide a partner bonus upon her admittance to the partnership.

Supporting calculations for the bonus:

Abrams, member equity ($154,000 + $16,000)…… $170,000

Lipscomb, member equity ($208,000 + $24,000)… 232,000

Contribution by Lin……… 228,000

Total equity after admitting Lin……… $630,000

Lin’s equity interest after admission……… × 30%

Lin, member equity……… $189,000

Contribution by Lin……… $228,000

Lin’s equity interest after admission……… 189,000

Bonus paid to Abrams and Lipscomb……… $ 39,000

(2)

* $7,500 × 2/5 = $3,000

** $7,500 × 3/5 = $4,500

Supporting calculations for the bonus:

Abrams, member equity……… $170,000

Lipscomb, member equity……… 232,000

Contribution by Lin……… 124,000

Total equity after admitting Lin……… $526,000

Lin’s equity interest after admission……… × 25 %

Lin, member equity……… $131,500

Contribution by Lin……… 124,000

Bonus paid to Lin……… $ 7,500

… $

…

D Perez, capital……… $ 48,000 Contribution by Perez……… 40,000 Bonus paid to Perez……… $ 8,000 (2)

* $18,400 × 1/2 = $9,200

Supporting calculations for the bonus:

G Ferris, capital……… $124,000

T Martinez, capital……… 76,000 Contribution by Perez……… 112,000 Total equity after admitting Perez………… $312,000 Perez’s equity interest after admission × 30 %

D Perez, capital……… $ 93,600 Contribution by Perez……… $112,000

D Perez, capital……… 93,600 Bonus paid to Ferris and Martinez $ 18,400 The bonus to Ferris and Martinez is credited equally between Ferris’ and Martinez’s capital accounts.

Ex 12–16

ANGEL INVESTOR ASSOCIATES Statement of Partnership Equity For the Year Ended December 31, 2014

Dennis Overton, Capital

Ben Testerman, Capital

Randy Campbell, Capital

Total Partner- ship Capital

Admission of Randy Campbel l :

Equity of initial partners prior to admission……… $300,000

Total……… $375,000

Campbell’s equity after admission……… $ 75,000

Net income distributio n :

The income-sharing ratio is equal to the proportion of the capital balances

after admitting Campbell according to the partnership agreement:

$180,000 Dennis Overton:

These ratios can be multiplied by the $110,000 remaining income after the

salary allowance to Overton ($150,000 – $40,000) These amounts are credited to

the respective partner capital accounts For example, Dennis Overton: $52,800 =

$110,000 × 48%.

…

Ex 12–16 (Concluded)

Withdrawal s :

Half of the remaining income is distributed to the three partners Overton

need not take the salary allowance as a withdrawal but may allow it to

accumulate in the member equity account He is taking half of the

a The income-sharing ratio is determined by dividing the net income

for each member by the total net income Thus, in 2014, the

income-sharing ratio is as follows:

d The positive entries to Idaho Properties and Silver Streams are the result of a bonus paid by Thomas Dunn.

e Thomas Dunn acquired a 22% interest in the business on January 1,

2015, computed as follows:

Thomas Dunn, member equity……… $ 220,000

Silver Streams, LLC, member equity……… 447,000 Total……… $1,000,000 Thomas’ ownership interest after admission

f Withdrawals need not be the same as the income credited to the members’ equity accounts Withdrawals will be less than the amounts credited when the members wish to retain capital in the business to support business growth or otherwise strengthen the business.

b Division of loss on realization*……… 8,000 8,000

Capital balances before realization………… $28,000 $35,000 $63,000 Division of gain on realization

[($67,000 – $63,000) ÷ 2]……… 2,000 2,000

Capital balances after realization………… $30,000 $37,000

Cash distributed to partners……… 30,000 37,000

Capital balances after realization……… $73,500 $41,000 $(17,000) Receipt of partner deficiency……… 17,000 Capital balances after eliminating

deficiency……… $73,500 $41,000 $ 0

Dr.

Ex 12–22

a Cash should be distributed as indicated in the following tabulation:

Capital invested………

Net income………

$225 +325

$300 +325

$ — +325

$ 525 + 975 * Capital balances and

Capital balances after realization……$(15,000) $ 46,000 $71,000 Distribution of partner deficiency…… 15,000 (10,000)*

Capital balances after deficiency

(5,000)** distribution………$ 0 $ 36,000 $66,000

* $15,000 × 2/3

** $15,000 × 1/3

CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex 12–24

GOLD, PORTER, AND SIMS Statement of Partnership Liquidation For the Period Ending July 1–29, 2014

Balances before realization $ 56,000 $ 96,000 $ 32,000 $55,000 $45,000 $20,000 Sale of assets and division of loss +90,000 –96,000 — –3,000 –2,000 –1,000

Balances after payment of liabilities $114,000 $ 0 $ 0 $52,000 $43,000 $19,000

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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex 12–25

a.

b.

c The income- and loss-sharing ratio is only used to distribute the gain or loss on the realization of asset sales.

It is not used for the final distribution The final distribution is based upon the credit balances in the member equity accounts after all gains and losses on realization have been divided and any partner deficiencies have been paid or allocated.

12-24

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ARCADIA SALES, LLC Statement of LLC Liquidation For the Period August 1–31, 2014

Noncash

Member Equity

CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Angel Alvarez

Emma Allison Total