CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS AND LIMITED LIABILITY COMPANIES DISCUSSION QUESTIONS 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 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 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 The partnership agreement (partnership) or operating agreement (LLC) establishes the incomesharing 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 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 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 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 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 12-1 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 12 Accounting for Partnerships and Limited Liability Companies DISCUSSION QUESTIONS (Continued) 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 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 12-2 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part PRACTICE EXERCISES PE 12–1A Cash Accounts Receivable Patent Accounts Payable Allowance for Doubtful Accounts Rachel Bell, Capital 51,000 65,000 195,000 12,000 3,000 296,000 PE 12–1B Cash Inventory Land Notes Payable Austin Fisher, Capital 36,000 42,000 175,000 35,000 218,000 PE 12–2A Distributed to Orr and Graham: Graham Total Annual salary……………………$28,000 3,6001 Interest………………………… 3,600 Remaining income…………… $ $28,000 12,600 5,400 Total distributed to partners… $35,200 $10,800 $60,000 × 6% $150,000 × 6% ($46,000 – $28,000 – $12,600) × 2/3 ($46,000 – $28,000 – $12,600) × 1/3 Orr: $35,200 Orr 9,000 1,800 $46,000 PE 12–2B Distributed to Prado and Nicks: Prado Nicks Interest…………………………… 1,000 Remaining income……………… 35,250 Total distributed to partners… $36,250 $38,000 Annual salary…………………… $ Total $ 38,000 2,500 35,250 $75,750 3,500 70,500 $112,000 $20,000 × 5% $50,000 × 5% ($112,000 – $38,000 – $3,500) × 50% Nicks: $75,750 PE 12–3A a Land Tony Vale, Capital Jordan Henry, Capital ($125,000 – $80,000) × 50% Jordan Henry, Capital Amar Harb, Capital ($30,000 + $22,500) × 50% b 45,000 22,500 22,500 26,250 26,250 PE 12–3B a Equipment Kevin Camden, Capital Chloe Sayler, Capital ($39,000 – $30,000) × 2/3 b Cash Demarco Lee, Capital 9,000 6,000 3,000 60,000 60,000 PE 12–4A Equity of Bellows…………………………………………………………………… Rodriguez’s contribution………………………………………………………… Total equity after admitting Rodriguez………………………………………… Rodriguez’s equity interest……………………………………………………… Rodriguez’s equity after admission……………………………………………… Rodriguez’s contribution………………………………………………………… Rodriguez’s equity after admission…………………………………………… Bonus paid to Bellows…………………………………………………………… $200,000 360,000 $560,000 × 60% $336,000 $360,000 336,000 $ 24,000 PE 12–4B Equity of Hiro……………………………………………………………………… Marone’s contribution……………………………………………………………… Total equity after admitting Marone……………………………………………… Marone’s equity interest……………………………………………………… … Marone’s equity after admission………………………………………………… Marone’s contribution……………………………………………………………… Bonus paid to Marone……………………………………………………………… $ 75,000 25,000 $100,000 × 40% $ 40,000 25,000 $ 15,000 PE 12–5A Morgan’s equity prior to liquidation…………………………… Realization of asset sales………………………………………… $120,000 Book value of assets 102,000 ($32,000 + $60,000 + $10,000)……………………………… $ 18,000 Gain on liquidation……………………………………………… Morgan’s share of gain (50% × $18,000)……………………… Morgan’s cash distribution……………………………………… $32,000 9,000 $41,000 PE 12–5B Manning’s equity prior to liquidation………………………… Realization of asset sales………………………………………… $410,000 Book value of assets 470,000 ($240,000 + $150,000 + $80,000)…………………………… Loss on liquidation……………………………………………… $ (60,000) Manning’s share of loss (50% × $60,000)…………………… Manning’s cash distribution…………………………………… $240,000 30,000 $270,000 PE 12–6A a Barns’ equity prior to liquidation……………… Realization of asset sales………………………… Book value of assets*…………………………… Loss on liquidation……………………………… Barns’ share of loss (50% × –$120,000)……… Barns’ deficiency………………………………… $55,000 $ 40,000 160,000 $(120,000) (60,000) $ (5,000) * $105,000 + $55,000 b $40,000 ($105,000 – $60,000 share of loss – $5,000 Barns’ deficiency; also equals the amount realized from asset sales) PE 12–6B a Bonilla’s equity prior to liquidation…………… Realization of asset sales……………………… Book value of assets*……………………………… Loss on liquidation………………………………… Bonilla’s share of loss (50% × –$400,000)…… Bonilla’s deficiency………………………………… $ 185,000 $ 30,000 430,000 $(400,000) (200,000) $ (15,000) * $185,000 + $245,000 b $30,000 ($245,000 – $200,000 share of loss – $15,000 Bonilla’s deficiency; also equals the amount realized from asset sales) PE 12–7A a 2014: $12,375,000 = $165,000 per employee 75 employees 2015: $15,400,000 = $175,000 per employee 88 employees b Niles and Cohen, CPAs grew revenues by $3,025,000 ($15,400,0000 – $12,375,000), or 24.4% ($3,025,000 ÷ $12,375,000) The number of employees expanded by 13, or 17.3% (13 ÷ 75) The growth in revenue was more than the growth in the number of employees; thus, the revenue per employee improved between the two years The firm is more efficient in generating revenues from its staff resources between the two years PE 12–7B a 2014: $1,800,000 = $150,000 per employee 12 employees 2015: $1,440,000 = $160,000 per employee employees b Eclipse Architects reduced revenues by $360,000 ($1,800,000 – $1,440,000), or 20% ($360,000 ÷ $1,800,000) The number of employees declined by 3, or 25% (3 ÷ 12) The decline in revenue was less than the decline in the number of employees; thus, the revenue per employee improved between the two years The firm is more efficient in generating revenues from its staff resources between the two years EXERCISES Ex 12–1 Cash Accounts Receivable* Merchandise Inventory Equipment Allowance for Doubtful Accounts Beyonce Sheffield, Capital 18,000 141,000 98,400 81,500 5,700 333,200 *$146,000 – $5,000 Ex 12–2 Cash Accounts Receivable Land Equipment Allowance for Doubtful Accounts Accounts Payable Notes Payable Amanda Carcello, Capital 60,000 130,000 275,000 30,500 8,500 24,800 90,000 372,200 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies Ex 12–3 a b c d e …………………………………………………… …………………………………………………… …………………………………………………… …………………………………………………… …………………………………………………… Details: Murphy Murphy Drake $175,000 262,500 146,300 170,000 174,500 $175,000 87,500 203,700 180,000 175,500 Drake Total a Net income (1:1)…………………$175,000 $175,000 $350,000 b Net income (3:1)…………………$262,500 $ 87,500 $ 4,500 $350,000 $ 18,000 c Interest allowance……………… $ 13,500 Remaining income (2:3)……… 132,800 Net income……………………… $146,300 d Salary allowance……………… $ 40,000 Remaining income (1:1)……… 130,000 Net income……………………… $170,000 e Interest allowance……………… $ 13,500 Salary allowance………………… 40,000 Remaining income (1:1)……… 121,000 Net income……………………… $174,500 199,200 332,000 $203,700 $350,000 $ 50,000 130,000 $ 90,000 260,000 $180,000 $ 4,500 $350,000 $ 18,000 50,000 121,000 90,000 242,000 $175,500 $350,000 $270,000 × 5% $90,000 × 5% 12-9 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 12 Accounting for Partnerships and Limited Liability Companies Prob 12–1B Apr Cash Merchandise Inventory Whitney Lang, Capital 18,000 50,000 Cash Accounts Receivable Merchandise Inventory Equipment Allowance for Doubtful Accounts Accounts Payable Notes Payable Eli Capri, Capital 26,200 43,400 28,900 63,400 68,000 3,500 23,400 15,000 120,000 LANG AND CAPRI Balance Sheet April 1, 2013 Assets Current assets: Cash Accounts receivable Less allowance for doubtful accounts $ 44,200 $43,400 3,500 Merchandise inventory 39,900 78,900 Total current assets Plant assets: Equipment $163,000 63,400 $226,400 Total assets Liabilities Current liabilities: Accounts payable Notes payable $ 23,400 15,000 Total liabilities $ 38,400 Partners’ Equity Whitney Lang, capital Eli Capri, capital $ 68,000 120,000 Total partners’ equity Total liabilities and partners’ equity 188,000 $226,400 12-37 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Prob 12–1B (Concluded) Mar 31 Income Summary Whitney Lang, Capital* Eli Capri, Capital* 118,000 31 Whitney Lang, Capital Eli Capri, Capital Whitney Lang, Drawing Eli Capri, Drawing 40,000 30,000 * Computations: Interest allowance……………… Salary allowance……………… Remaining income (1:1)……… Net income……………………… 10% × $68,000 10% × $120,000 ($118,000 – $18,800 – $58,000) × 1/2 63,400 54,600 40,000 30,000 Lang $ 6,800 Capri 36,000 20,600 $63,400 Total $ 12,000 22,000 20,600 $54,600 $ 18,800 58,000 41,200 $118,000 Prob 12–2B Plan a b c d e f (1) $420,000 Howell ………………………………………… $210,000 168,000 ……………………………………… ………………………………………… 280,000 249,500 ……………………………………… ………………………………………… 218,250 254,550 ……………………………………… Details: (2) $150,000 Nickles Howell Nickles $210,000 252,000 140,000 170,500 201,750 165,450 $ 75,000 60,000 100,000 87,500 83,250 92,550 $75,000 90,000 50,000 62,500 66,750 57,450 $420,000 $150,000 Howell Nickles Howell a Net income (1:1)…………………… $210,000 $210,000 $ 75,000 $75,000 b Net income (2:3)…………………… $168,000 $252,000 $ 60,000 $90,000 c Net income (2:1)…………………… $280,000 $140,000 $100,000 $50,000 d Interest allowance………………… Remaining income (3:2)…………… Net income………………………… $ $ $ 5,000 82,500 $ 7,500 55,000 $249,500 $170,500 $ 87,500 $62,500 e Interest allowance………………… Salary allowance…………………… $ $ $ 5,000 38,000 40,250 $ 7,500 19,000 40,250 Remaining income (1:1)………… Net income………………………… f Interest allowance………………… Salary allowance…………………… Bonus allowance………………… Remaining income (1:1)…………… Net income………………………… * 20% × [$420,000 – ($38,000 + $19,000)] ** 20% × [$150,000 – ($38,000 + $19,000)] 5,000 244,500 5,000 38,000 175,250 7,500 163,000 7,500 19,000 175,250 Nickles $218,250 $201,750 $ 83,250 $66,750 $ $ $ $ 7,500 19,000 5,000 38,000 72,600 * 138,950 $254,550 7,500 19,000 138,950 $165,450 5,000 38,000 18,600 ** 30,950 $ 92,550 30,950 $57,450 Prob 12–3B RAMIREZ AND XUE Income Statement For the Year Ended December 31, 2014 Professional fees Operating expenses: Salary expense Depreciation expense—building Heating and lighting expense Depreciation expense—office equipment Property tax expense Supplies expense Miscellaneous expense $555,300 $384,900 12,900 10,500 6,300 3,200 3,000 2,500 Total operating expenses Net income 423,300 $132,000 Camila Ping Ramirez Xue Total $65,000 $115,000 Division of net income: Salary allowance………………………… $50,000 Interest allowance……………………… 15,000 * Remaining income (loss) (1:1)……… (7,100) Net income………………………………… $57,900 16,200 ** (7,100) $74,100 31,200 (14,200) $132,000 * $125,000 × 12% ** ($155,000 – $20,000) × 12% RAMIREZ AND XUE Statement of Partnership Equity For the Year Ended December 31, 2014 Camila Ping Ramirez Xue Capital, January 1, 2014 Additional investment during the year Net income for the year Withdrawals during the year Capital, December 31, 2014 $125,000 Total $135,000 $260,000 20,000 20,000 $125,000 57,900 $155,000 74,100 $280,000 132,000 $182,900 35,000 $147,900 $229,100 50,000 $412,000 85,000 $327,000 — $179,100 12-40 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Prob 12–3B (Concluded) RAMIREZ AND XUE Balance Sheet December 31, 2014 Assets Current assets: Cash Accounts receivable Supplies $ 70,300 33,600 5,800 Total current assets Plant assets: Land $109,700 $128,000 Building Less accumulated depreciation $175,000 80,000 95,000 Office equipment Less accumulated depreciation $ 42,000 25,300 16,700 Total plant assets Total assets 239,700 $349,400 Liabilities Current liabilities: Accounts payable Salaries payable $ 12,400 10,000 Total liabilities $ 22,400 Partners’ Equity Camila Ramirez, capital Ping Xue, capital $147,900 179,100 Total partners’ equity Total liabilities and partners’ equity 327,000 $349,400 12-41 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Prob 12–4B Aug 31 Asset Revaluations Accounts Receivable Allowance for Doubtful Accounts [($19,500 – $1,500) × 5%] – $600 1,800 31 Merchandise Inventory Asset Revaluations 4,300 1,500 300 4,300 $46,800 – $42,500 Sept 31 Accumulated Depreciation—Equipment Equipment Asset Revaluations $64,500 – $67,500 15,500 31 Asset Revaluations Brian Caldwell, Capital Adriana Estrada, Capital 15,000 Adriana Estrada, Capital Kris Mays, Capital 26,000 Cash Kris Mays, Capital 32,000 3,000 12,500 7,500 7,500 26,000 32,000 Prob 12–4B (Concluded) CALDWELL, ESTRADA, AND MAYS Balance Sheet September 1, 2014 Assets Current assets: Cash $44,300 Accounts receivable Less allowance for doubtful accounts Merchandise inventory Prepaid insurance $18,000 900 17,100 46,800 1,200 Total current assets Plant assets: Equipment $109,400 Total assets $173,900 64,500 Liabilities Current liabilities: Accounts payable Notes payable $ 8,900 15,000 Total liabilities $ 23,900 Partners’ Equity Brian Caldwell, capital Adriana Estrada, capital Kris Mays, capital $62,500 Total partners’ equity Total liabilities and partners’ equity $12,300 + $32,000 $55,000 + $7,500 $48,000 + $7,500 – $26,000 29,500 58,000 150,000 $173,900 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies Prob 12–5B FAIRCHILD, LOWES, AND HOWARD Statement of Partnership Liquidation For the Period April 10–30, 2014 Capital Noncash Cash Balances before realization a Sale of assets and division of loss Balances after realization b Payment of liabilities Balances after payment of liabilities c Receipt of deficiency Balances d Cash distributed to partners Final balances a $23,500 +48,500 $72,000 –22,000 $50,000 +1,500 $51,500 –51,500 $ + Fairchild Assets = Liabilities + $84,500 –84,500 $ — $ — $ — $ $22,000 — $22,000 –22,000 Zach Fairchild, Capital Amber Howard, Capital Austin Lowes, Capital $ — $ — $ (1/4) $42,000 –9,000 $33,000 — $33,000 — $33,000 –33,000 $ Lowes + (1/4) Howard + $ 7,500 –9,000 $(1,500) — $(1,500) +1,500 $ $ — (2/4) $36,500 –18,000 $18,500 — $18,500 — $18,500 –18,500 $ 500 1,000 1,500 The $1,500 deficiency of Lowes would be divided between the other partners, Fairchild and Howard, in their income-sharing ratio (1:2 respectively) Therefore, Fairchild would absorb 1/3 of the $1,500 deficiency, or $500, and Howard would absorb 2/3 of the $1,500 deficiency, or $1,000 b Zach Fairchild, Capital* Amber Howard, Capital** Cash *$33,000 – $500 **$18,500 – $1,000 32,500 17,500 50,000 12-44 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 12 Accounting for Partnerships and Limited Liability Companies Prob 12–6B CHAPELLE, ROCK, AND PRYOR Statement of Partnership Liquidation For Period August 3–29, 2014 a Capital Chapelle Noncash + Cash = Assets Liabilities + Pryor Rock + (1/5) + (2/5) (2/5) Balances before realization Sale of assets and division of gain $ 65,000 +217,000 $167,000 –167,000 $30,000 — $14,000 +10,000 $102,000 +20,000 $ 86,000 +20,000 Balances after realization Payment of liabilities $282,000 –30,000 $ — $30,000 –30,000 $24,000 — $122,000 — $106,000 — Balances after payment of liabilities Cash distributed to partners $252,000 –252,000 $ — $ — $24,000 –24,000 $122,000 –122,000 $106,000 –106,000 Final balances $ $ $ $ $ $ 0 12-45 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 12 Accounting for Partnerships and Limited Liability Companies Prob 12–6B (Concluded) CHAPELLE, ROCK, AND PRYOR Statement of Partnership Liquidation For Period August 3–29, 2014 b Capital Noncash Cash = Liabilities Assets $167,000 –167,000 $ — $30,000 — Balances after realization Payment of liabilities $ 65,000 +72,000 $137,000 –30,000 Balances after payment of liabilities Receipt of deficiency $107,000 +5,000 $ — $ Balances Cash distributed to partners $112,000 –112,000 $ $ — $ $ $ Balances before realization Sale of assets and division of loss Final balances a + Chapelle Rock, Capital Pryor, Capital Chapelle, Capital + (1/5) Rock + (2/5) $102,000 –38,000 $ 64,000 — $86,000 –38,000 — $ (5,000) +5,000 $ 64,000 — $48,000 — — $ $ 64,000 –64,000 $ $48,000 –48,000 $ $30,000 –30,000 $ — 2,500 2,500 5,000 Rock, Capital* Pryor, Capital** Cash *$64,000 – $2,500 **$48,000 – $2,500 (2/5) $14,000 –19,000 $ (5,000) — The $5,000 deficiency of Chapelle would be divided between the other partners, Rock and Pryor, in their income-sharing ratio (1:1, respectively) Therefore, Rock would absorb 1/2 of the $5,000 deficiency, or $2,500, and Pryor would absorb 1/2 of the $5,000 deficiency, or $2,500 b Pryor + 61,500 45,500 107,000 12-46 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part $48,000 — CHAPTER 12 Accounting for Partnerships and Limited Liability Companies CASES & PROJECTS CP 12–1 This scenario highlights one of the problems that arises in partnerships: attempting to align contribution with income division Often, disagreements are based on honest differences of opinion However, in this scenario, there is evidence that Robbins was acting unethically Robbins apparently made no mention of his plans to “scale back” once the partnership was consummated As a result, Barrow agreed to an equal division of income based on the assumption that Robbins’ past efforts would project into the future, while in fact, Robbins had no intention of this As a result, Barrow is now providing more effort, while receiving the same income as Robbins This is clearly not sustainable in the long term Robbins does not appear to be concerned about this inequity Thus, the evidence points to some duplicity on Robbins’ part Essentially, he knows that he is riding on Barrow’s effort and had planned it that way Barrow could respond to this situation by either withdrawing from the partnership or changing the partnership agreement One possible change would be to provide a partner salary based on the amount of patient billings This salary would be highly associated with the amount of revenue brought into the partnership, thus avoiding disputes associated with unequal contributions to the firm CP 12–2 A good solution to this problem would be to divide income in three steps: Provide interest on each partner’s capital balance Provide a monthly salary for each partner Divide the remainder according to a partnership formula With this approach, the return on capital and effort will be separately calculated in the income division formula before applying the percentage formula Thus, Willard will receive a large interest distribution based on the large capital balance, while Hill should receive a large salary distribution based on the larger service contribution The return on capital and salary allowances should be based on prevailing market rates If both partners are pleased with their return on capital and effort, then the remaining income could be divided equally between them 12-47 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 12 Accounting for Partnerships and Limited Liability Companies CP 12–3 a Revenue per Revenue per Professional Partner* Staff** Deloitte & Touche………………………………… $3,795,281 3,645,191 PwC………………………………………………… 3,086,957 Ernst & Young…………………………………… KPMG………………………………………………… 2,779,420 $324,685 370,897 405,714 331,188 PwC is PricewaterhouseCoopers * Revenue per partner is determined by dividing the total revenue by the number of partners for each firm, adjusting the revenues for the fact that they are expressed in millions in the table For example, revenue per partner is determined for Deloitte & Touche as follows: Deloitte & Touche revenue per partner: $10,938,000,000 = $3,795,281 2,882 ** Likewise, the revenue per professional staff is determined by dividing the total revenue by the number of professional staff, adjusting the revenues for the fact that they are expressed in millions in the table For example, revenue per professional staff is determined for Deloitte & Touche as follows: Deloitte & Touche revenue per professional staff: $10,938,000,000 = $324,685 33,688 b The amount of revenue earned per partner can be compared across the four firms by setting each firm’s revenue per partner as a percent of the highest revenue per partner firm, as follows: Percent of Revenue per Deloitte & Partner Touche Deloitte & Touche………………………………… $3,795,281 PwC………………………………………………… 3,645,191 Ernst & Young……………………………………… 3,086,957 KPMG……………………………………………… 2,779,420 100% 96%* 81% 73% * $3,645,191 ÷ $3,795,281 As can be seen, Deloitte & Touche has the highest revenue per partner relative to the other three firms, while KPMG has the lowest KPMG’s revenue per partner is 73% of Deloitte & Touche’s These data suggest that 12-48 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 12 Accounting for Partnerships and Limited Liability Companies Deloitte & Touche has a somewhat smaller partner base supporting its revenues than the other three firms 12-49 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CP 12–3 (Concluded) The amount of revenue earned per professional staff can be compared across the four firms by setting each firm’s revenue per professional staff as a percent of the highest revenue per professional staff firm, as follows: Revenue per Percent of Professional Ernst & Staff Young Deloitte & Touche………………………… $324,685 PwC………………………………………… 370,897 Ernst & Young…………………………… 405,714 KPMG……………………………………… 331,188 80%* 91% 100% 82% * $324,685 ÷ $405,714 As can be seen, Ernst & Young has the highest revenue per professional staff of the four firms PwC, for example, has revenue per professional staff equal to 91% of Ernst & Young Ernst & Young appears to be the most efficient firm in the use of professional staff compared to the other three firms Taken together, both tables indicate that Deloitte & Touche provides more revenue per partner (and possibly more profit per partner) than the other three firms, but does not have the operating efficiency of Ernst & Young in terms of the use of professional staff In contrast, Ernst & Young appears to have the most efficient use of professional staff of all the firms, but provides less revenue per partner (and possibly less profit per partner) than does Deloitte & Touche CP 12–4 When developing an LLC (or partnership), the operating (or partnership) agreement is a critical part of establishing a business Each party must consider the various incentives of each individual in the LLC For example, in this case, one party, Lindsey Wilson, is providing all of the funding, while the other two parties are providing expertise and talent This type of arrangement can create some natural conflicts because the interests of an investor might not be exactly the same as those operating the LLC Specifically, you would want to advise Wilson that not all matters should be settled by majority vote Such a provision would allow the two noninvesting members to vote as a block to the detriment of Wilson For example, the salaries for the two working members could be set by their vote, so that little profit would be left to be distributed This would essentially keep Wilson’s return limited to the 10% preferred return Wilson should insist that salary allowances require unanimous approval of all members CP 12–4 (Concluded) A second issue is the division of partnership income The suggested agreement is for all the partners to share the remaining income, after the 10% preferred return, equally Wilson should be counseled to consider all aspects of the LLC contribution to determine if this division is equitable There are many considerations including the amount of investment, risk of the venture, degree of expertise of noninvesting partners, and degree of exclusivity of noninvesting members’ effort contribution (unique skills or business connections, for example) Often, the simple assumption of equal division is not appropriate In addition, it is sometimes best to require even working members to have an investment in the LLC, even if it is small, so that they are sensitive to the perspective of financial loss CP 12–5 a Chrysler Group LLC produces and sells Chrysler, Jeep, and Dodge vehicles b A transaction selling a majority interest of Chrysler from DaimlerChrysler to Cerberus Capital Management to form Chrysler LLC was announced on May 14, 2007, and completed on August 3, 2007 Since that time, Chrysler LLC went into Chapter 11 bankruptcy and emerged in late 2009 as Chrysler Group LLC The new entity has an alliance with Fiat In 2011, Fiat exercised options to increase its ownership stake c Chrysler Group LLC went through significant changes during the recession of 2009 The U.S government provided bailout funds that were turned into an equity interest in the firm As of June 30, 2011, Chrysler Group LLC was 47% owned by Fiat, 45% by the United Auto Workers union, 6.5% by the U.S government, and 1.5% by the Canadian government d Chrysler Group LLC is not a public company Its major owners, Fiat, UAW, U.S and Canadian governments, and private equity funds hold their ownership interests privately The LLC form is well suited to Chrysler Group because there are a few large private owners to the firm Note to Instructors: The ownership details of part (c) change over time as Fiat continues to exercise options to buy out other members Students may have more current details than provided here The point of the case is to see that the ownership structure is limited to a few members Wikipedia provides dated ownership information which should be satisfactory for the purposes of the case 12-50 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part ... 35,250 $75,750 3,500 70,500 $ 112, 000 $20,000 × 5% $50,000 × 5% ($ 112, 000 – $38,000 – $3,500) × 50% Nicks: $75,750 PE 12 3A a Land Tony Vale, Capital Jordan Henry, Capital ( $125 ,000 – $80,000) × 50%... 60,000 130,000 275,000 30,500 8,500 24,800 90,000 372,200 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies Ex 12 3 a b c d e …………………………………………………… …………………………………………………… ……………………………………………………... interest after admission … D Perez, capital…………………………… $124 ,000 76,000 112, 000 $ 312, 000 $ 30% × $ 93,600 Contribution by Perez……………………… $ 112, 000 93,600 D Perez, capital……………………………… $ 18,400 Bonus