Advantages of the partnership format include ease of creation and the absence of the double taxation effect inherent to the income earned by a corporation and distributed to its owners..
Trang 1CHAPTER 14 PARTNERSHIPS: FORMATION AND OPERATIONChapter Outline
I Business organizations that are formed legally as partnerships, although they are not always as visible as corporations, still proliferate throughout this country especially in the legal, medical, and accounting professions.
A Advantages of the partnership format include ease of creation and the absence of the double taxation effect inherent to the income earned by a corporation and distributed to its owners.
B Partnerships, however, rarely grow to a significant size (when compared with large corporate organizations) primarily because of the unlimited liability being assumed by each general partner.
C Alternative legal formats have been created over the years to combine the benefits of corporations and partnerships such as S corporations, limited liability partnerships, and limited liability companies.
II Partnership accounting and the capital accounts
A The distinctive aspects of partnership accounting center on the capital accounts maintained for each individual partner.
B The basis of accounting for these capital balances is the Articles of Partnership agreement which establishes provisions for initial investments, withdrawals, admission
of a new partner, retirement of a partner, etc.
C The actual contribution made by the partners to the business should be recorded at fair market value A problem arises, however, when a contribution is truly intangible such as
a particular expertise or an established client base.
1 In the bonus method, only identifiable assets are valued and recorded The capital account balances are then aligned to indicate the percentage of the actual contributions being made by each partner.
2 In the goodwill method, the amount being contributed and the corresponding percentage of the initial capital balance are used to calculate the value of the business and the presence of goodwill, a figure which is physically recorded as an intangible asset.
III Partnership income allocation
A At the end of each fiscal period, the revenue and expense accounts must be closed out with the resulting income figure being assigned to the individual capital accounts.
B The method of allocating income to the capital accounts should be established within the Articles of Partnership.
Trang 21 The partners can simply assume an equal division of profits and losses, if no distribution of profits/losses are specified in the partnership agreement, it is assumed the distribution is equal If a distribution of profits is specified, but not losses, it is assumed the distribution is the same as for profits.
2 The partners, however, can select any method that is designed to arrive at an equitable allocation Such factors as the amounts of capital invested, the time worked in the business, and the degree of business expertise may all serve to influence the assignment of income.
IV Accounting for partnership dissolution
A Over time, the identity of the individuals within a partnership can change through admission of a new partner or the death, retirement, or withdrawal of a present partner.
B Each change in composition serves to dissolve the original partnership, so that a new partnership is formed to continue the business Thus, dissolution does not necessarily affect the operations of the business
C Admission of a new partner.
1 A new partner will often buy all (or a portion) of the interest owned by one or more of the present partners.
a The capital account balances can simply be reclassified to reflect the identity of the new ownership
b As an alternative, all accounts may be adjusted to fair market value with the price paid being used as the basis for calculating any goodwill.
2 A new partner can also be admitted by a direct contribution to the partnership business.
a The bonus (or no revaluation) method records the identifiable assets being contributed at fair market value The new partner’s capital is set equal to a prearranged percentage or amount The remaining capital balances are then aligned based on profit and loss percentages.
b The goodwill (or revaluation) approach initially adjusts all assets and liabilities of the partnership to fair market value and records goodwill based on the amount being paid (which is used to calculate the implied value of the business).
D Withdrawal of a partner
1 The final asset distribution to an individual should be based on the agreement established in the Articles of Partnership and will often vary in amount from that partner's ending capital balance.
2 The difference between the amount paid and the final capital balance can simply be recorded as an adjustment to the remaining partners' capital accounts in the same manner as the bonus method.
3 As an alternative, all accounts can be adjusted to fair value with the amount of payment being used as the basis for computing goodwill.
Trang 3Answers to Discussion Questions
What kind of business is this?
The owners of this business face a common problem: they began operations without seriously considering the company’s legal form The accountant now needs to specify the advantages and disadvantages of the partnership versus corporate or some other legal form Eventually, the owners must make this decision but should consider all relevant factors in their choice The accountant should discuss the following issues with the two owners:
—Ease of formation A formal partnership can be created by the writing of an Articles of Partnership If income allocation and partners’ contributions are already determined, the document preparation should be relatively simple Forming a corporation is a usually a more difficult task depending on individual state laws The accountant should explain the specific procedures that apply to partnerships in the state where the business is organized and conducts its operations.
—Business liabilities In a partnership, any partner may be held liable for all business debts Thus, if liabilities escalate and the business fails, each partner risks a large possible loss The same problem does not exist in a corporation where owners and the business are separate entities For the owners, potential losses are, in corporations, normally limited to the amount being invested However, in many small, newly created, corporations, the owners are required to personally guarantee any loans Therefore, to an extent, the concept of unlimited liability may actually be present in either case The partners should forecast the amount of debts that will be incurred and the possible outcome if the business would happen to fail.
—Lawsuits Some businesses are more susceptible to lawsuits than others A florist, for example, would likely have less risk than a pharmaceutical company The concept of personal liability for business debts becomes especially important when litigation risk is high.
To reduce such risk, creating a corporation to protect the personal property of the stockholders may be a wise move The owners of a partnership may become personally responsible for losses created by a business mistake or accident The need for this responsibility is recognized in states that prohibit doctors, lawyers, accountants, and the like from incorporating Such states, however, allow licensed professionals to operate LLPs.
—Taxation In a partnership, all income is allocated to the owners immediately and they are taxed on this amount Double-taxation is avoided A corporation pays an income tax and any dividends are then taxed again when collected by the owners Therefore, traditionally, partnerships are viewed as having a tax advantage The accountant should also mention to the partners other possible tax factors that may affect their decision For example, in small corporations, double taxation may not be a problem If salaries paid to the owners are reasonable and approximate the company's profits so that no dividends are distributed, only one tax is paid in either case As another issue, if a partnership suffers a loss (which often happens when companies begin operations), that loss is passed to the partners and can be used to reduce other taxable income However, in a corporation, losses are carried back and forward to reduce other taxable income that is earned by the business, possibly delaying the benefits of the loss As mentioned in the textbook, the owners should consider forming an S
Trang 4—Bankruptcy If the business should ever fail and have to be liquidated, losses of a partnership are passed directly to the owners to reduce taxable income immediately For a corporation, the loss is a capital loss to the stockholders which can only offset their own capital gains or
be deducted at the rate of $3,000 per year Thus, if a large loss is incurred, the tax benefits may not be realized for years into the future.
—Growth potential Traditionally, corporations have more growth potential than do partnerships Ownership interests can be easily transferred The limitation on liability encourages ownership by individuals who cannot participate in the management of the company Partnerships are more restricted in adding new owners Partnerships usually have to entice individuals who are willing to work in the business in order to obtain additional capital.
Therefore, the accountant may want to address the following questions in advising these clients:
What amount of time and energy is involved in becoming incorporated?
How much profit or loss is anticipated from the operations of this business in the foreseeable future?
How much debt will the new business incur?
Will this debt be guaranteed by the owners?
How much salary do the owners anticipate withdrawing from the business?
What are the chances of incurring lawsuits?
What is the possibility that the business will fail?
How large do the owners expect this business to grow? Do they anticipate the need for new owners and new capital?
Does the creation of an S Corporation apply to this particular business?
How Will the Profits Be Split?
This case is designed to point up the difficulty of designing a profit-sharing arrangement that is fair to all parties Currently, these three individuals have incomes totaling an amount in excess
of the first year income that is expected Thus, the adopted plan will have an immediate impact
on them The reduction of income must be absorbed by the partners in some equitable manner.
In addition, the income is projected to increase relatively fast so that the agreed -upon method needs to reward all participants properly over time.
Dewars has built up the firm and still handles the bigger clients although he plans to reduce his workload over the next few years Thus, one method of compensation would be to credit him with interest on the capital built up in the business However, if that number alone is used, it will tend to escalate even if his work hours are reduced For this reason, Dewars' share of the profits could also be based in some way on the number of hours that he works According to the information presented, this number will probably shrink over the years, reducing the profits allocated to Dewars Thus, this partner might be given interest equal to 10 percent of his capital balance and $50 for each hour worked.
Trang 5Huffman is contributing a significant number of hours to the firm but tends to work on the smaller jobs A possible allocation technique would be to give this partner a per hour allocation but one that is somewhat smaller than Dewars For example, Huffman could receive an income allocation of $30 per hour to begin That number could then be programmed to escalate over the years as Huffman starts to take over the bigger jobs.
Scriba's role is to develop a tax practice within the firm Consequently, one suggestion would be
to credit her capital account with a percentage of the tax revenues (20 percent, for example) each year In that way, she benefits by the amount of business that she is able to bring to the organization During the first years, though, she may have trouble getting the new part of this business to generate significant revenues Thus, the partners may want to set a minimum figure for her income allocation She could be credited, as an example, with 20 percent of tax revenues but not less than $50,000.
Many answers to this question are possible The above is just a simple suggestion based on the facts presented in the case Income allocation techniques are usually designed to reward the partners for the attributes that they bring to the organization Even with the above system, percentages would still be necessary to assign any remaining profit or loss If the partners are not totally satisfied with the system as designed, the percentages could be weighted or adjusted to reward any partner not being properly compensated.
Answers to Questions
1 The advantages of operating a business as a partnership include the ease of formation and the avoidance of the double taxation effect that inherently reduces the profits distributed to the owners of a corporation In addition, because the losses of a partnership pass, for tax purposes, directly through to the owners, partnerships have historically been used (especially in certain industries) to reduce or defer income taxes.
Several disadvantages also accrue from the partnership format Each general partner, for example, has unlimited liability for all debts of the business This potential liability can be especially significant in light of the concept of mutual agency, the right that each partner has
to create liabilities in the name of the partnership Because of the risks created by unlimited liability and mutual agency, the growth potential of most partnerships is severely limited Few people are willing to become general partners in an organization unless they can maintain some day-to-day contact and control over the business.
Further discussion of these issues can be found in the Answer to the first Discussion Question that appears above.
2 Specific partnership accounting problems center in the equity (or capital) section of the balance sheet In a corporation, stockholders' equity is divided between earned capital and contributed capital Conversely, for a partnership, each partner has an individual capital account that is not differentiated according to its sources Virtually all accounting issues encountered purely in connection with the partnership format are related to recording and maintaining these capital balances.
Trang 63 The balance in each partner's capital account measures that partner's interest in the book value of the business’ net assets This figure arises from contributions, earnings, drawings,
and other capital transactions.
4 A Subchapter S corporation is formed legally as a corporation so that its owners enjoy limited legal liability and easy transferability of ownership However, if a company qualifies and becomes a Subchapter S Corporation, it will be taxed in virtually the same manner as a partnership Hence, income will be taxed only once and that is to the owners at the time that
it is earned by the corporation.
Use of this designation is quite restricted To qualify as a Subchapter S Corporation, a company can only have one class of stock and must have no more than 100 owners These owners can only be individuals, estates, certain tax-exempt entities, and certain types of trusts Most corporations that do not qualify as Subchapter S Corporations are automatically Subchapter C Corporations These entities are also corporations but they pay income taxes when the income is earned Additionally, the owners are liable for a second income tax when dividends are distributed to them Thus, the income earned by a Subchapter C Corporation faces the double taxation effect commonly associated with corporations.
5 In a general partnership, each partner can have unlimited liability for the debts of the business Thus, partners may face significant risks, especially in connection with the actions and activities of other partners However, general partnerships are easy to form and often serve well in smaller businesses where all partners know each other The major advantage
of general partnerships is that income earned by the business is only taxed once when earned by the business No second tax is incurred as distributions are made to owners.
A limited liability partnership (LLP) is very similar to a general partnership except in the method by which a partner’s liability is measured In an LLP, the partners can still lose their entire investment and be held responsible for all contractual debts of the business such as loans However, partners cannot be held responsible for damages caused by other partners For example, if one partner carelessly causes damage and is sued, the other partners are not held responsible.
A limited liability company can now be created in certain situations This type of organization
is classified as a partnership for tax purposes to avoid the double-taxation effect However, the liability of the owners is limited to their individual investments like a Subchapter C Corporation Depending on state law, the number of owners is not restricted in the same manner as a Subchapter S Corporation so that there is a greater potential for growth.
6 The Articles of Partnership is a legal agreement that should be created as a prerequisite for the formation of a partnership This document defines the rights and responsibilities of the partners in relation to the business and in relation to each other Thus, it serves as a governing document for the partnership The Articles of Partnership may contain any number of provisions but should normally specify each of the following:
a Name and address of each partner
b Business location
Trang 7d Rights and responsibilities of each partner
e Initial investment to be made by each partner along with the method to be used for valuation
f Specific method by which profits and losses are to be allocated
g Periodic withdrawals to be allowed each partner
h Procedure for admitting new partners
i Method for arbitrating partnership disputes
j Method for settling a partner's share in the business upon withdrawal, retirement, or death
7 To give fair recognition to noncash contributions, all assets donated by the partners (such
as land or inventory) should be recorded by the partnership at their fair values at the date of investment However, for taxation purposes, the partner’s book value is retained.
8 In forming a partnership, one or more of the partners may be contributing some factor (such
as an established clientele or an expertise) which is not viewed normally as an asset in the traditional accounting sense In effect, the partner will be receiving a larger capital balance than the identifiable contributions would warrant
The bonus method of recording this transaction is to value and record only the identifiable assets such as land and buildings The capital accounts are then aligned to recognize the proportionate interest being assigned to each partner's investment If, for example, the capital balances are to be equal, they are set at identical amounts that correspond in total
to the value of the identifiable assets
As an alternative, the amounts contributed along with the established capital percentages can be used to determine mathematically the implied total value of the business and the presence of any goodwill brought into the business This goodwill is recognized at the time that the partnership is created so that the amount can be credited to the appropriate partner.
9 The Drawing account measures the amount of assets that a particular partner takes from the business during the current period Often, only regularly allowed distributions are recorded in the Drawing account with larger, more sporadic withdrawals being recorded as direct reductions to the partner's capital balance.
10 At the end of each fiscal year, when revenues and expenses are closed out, some assignment must be made of the resulting income figure Because a partnership will have two or more capital accounts rather than a single retained earnings balance This allocation
to the capital accounts is based on the agreement established by the partners preferably as
a part of the Articles of Partnership.
11 The allocation process can be based on any number of factors The actual assignment of income should be designed to give fair and equitable treatment to each of the partners Often, an interest factor is used to reward the capital investment of the partners A salary allowance is utilized as a means of recognizing the amount of time worked by an individual
or a certain degree of business expertise The allocation process can be further refined by a ratio that is either divided evenly among the partners or weighted in favor of one or more
Trang 812 If agreement as to the allocation of income has not been specified, an equal division among all partners is presumed If an agreement has been reached for assigning profits but no mention is made concerning losses, the assumption is made that the same method is intended in either case.
13 The dissolution of a partnership is the breakup or cessation of the partnership Many reasons can exist for a partnership to dissolve One partner may withdraw, retire, or die A new partner may be admitted to the partnership The original partnership terminates whenever the identity of the individuals serving as partners has changed.
Dissolution, however, does not necessarily lead to the liquidation of the business In most cases, but not all, a new partnership is formed which takes over the business Such dissolutions are no more than changes in the composition of the ownership and should not affect operations.
14 A new partner can join a partnership by acquiring part or all of the interest of one or more of the present partners This transaction is carried out with the individual partners directly and not with the partnership A new partner may also enter through a contribution to the business In such cases, the investment is made to the partnership rather than to the individuals.
15 In selling an interest in a partnership, three rights are conveyed to the new owner:
a The right of co-ownership of the business property;
b The right to a specified allocation of profits and losses generated by the partnership's business; and
c The right to participate in the management of the business.
No problem exists in selling or assigning the first two of these rights However, the right to participate in management decisions can only be transferred with the consent of all partners.
16 Any goodwill that is recognized in a capital transaction is allocated to the original partners based on the profit and loss ratio The goodwill amount is assumed to represent unrealized gains in the value of the business To determine the amount of goodwill, the implied value of the business as a whole must be calculated based on the price being paid for a portion by the new partner The difference between this implied value and the total capital is assumed
to be goodwill or some other adjustment to asset value.
17 Allocating goodwill to an entering partner may be necessary for several reasons One of the most common is that the partner is bringing to the partnership an attribute that is not an asset in the traditional accounting sense For example, a new partner with an excellent business reputation might be credited with goodwill at the time of entrance Other factors such as an established clientele or a professional expertise can justify attributing goodwill to the new partner The partnership might make this same concession to an entering partner if cash is urgently needed by the business and a larger share of the capital has to be offered
as an enticement to generate the new investment.
Trang 918 Book values in most cases measure historical cost expenditures which often have undergone years of allocation and changes in value For this reason, book value will frequently fail to mirror or even resemble the actual worth of a business In addition, the goodwill that is assumed to be present in a business as a going concern is not a factor that
is always reflected within book values Therefore, distributing partnership property to a withdrawing partner based on book value would not necessarily be fair Hence, the Articles
of Partnership should spell out a method by which an equitable settlement can be achieved.
Answers to Problems
1 B
2 C
3 D
4 C Mary Ann's investment equals 1/3 of total capital ($50,000 ÷ $150,000).
However, she receives only a 1/4 interest capital balance One explanation for the difference is that the business assets are worth more than book value To achieve agreement, the net assets could be valued upward to fair value with the adjustment credited to the original partners’ capital accounts Alternatively, a bonus could be credited to the original partners.
5 D The company’s implied value based on the new contribution is $233,333
($70,000 ÷ 30%) which is less than the capital balances ($280,000 in original capital plus $70,000 to be invested) Thus, either the assets are overvalued
or the new partner is also contributing goodwill Because the problem indicates that goodwill is recognized, that figure must be computed Note that the $70,000 is going into the business and, thus, increases capital Danville's investment = 30% (Original capital plus Danville's investment)
$70,000 + Goodwill = 30 ($280,000 + $70,000 + Goodwill)
$70,000 + Goodwill = $105,000 + 30 Goodwill
.70 Goodwill = $35,000 Goodwill = $50,000 Danville's investment (Capital) = $70,000 + $50,000 = $120,000
6 C The implied value of the company is $800,000 ($200,000 ÷ 25%) Because
the current capital total is only $600,000, goodwill of $200,000 must be recognized Oscar's investment is going to the partners so that it does not affect the capital total directly Of the $200,000 in goodwill, 30 percent or
$60,000 is attributed to Jethro which brings that capital balance to
$260,000 Because a 25% interest is conveyed to the new partner, Jethro's balance decreases by 25% or $65,000—a drop to $195,000.
Trang 107 B Total capital is $200,000 ($110,000 + $40,000 + $50,000) after the new
investment As Kansas's portion is 30 percent, the capital balance becomes
$60,000 ($200,000 × 30%) Because only $50,000 was paid, a bonus of
$10,000 is taken from the two original partners based on their profit and loss ratios: Bolcar – $7,000 (70%) and Neary – $3,000 (30%) The reduction drops Neary's capital balance from $40,000 to $37,000
8 B Total capital is $270,000 ($120,000 + $90,000 + $60,000) after the new
investment However, the implied value of the business based on the new investment is $300,000 ($60,000 ÷ 20%) Thus, goodwill of $30,000 must be recognized with the offsetting allocation to the original partners based on their profit and loss ratio: Bishop – $18,000 (60%) and Cotton $12,000 (40%) The increase raises Cotton's capital from $90,000 to $102,000.
9 A Total capital is $450,000 ($210,000 + $140,000 + $100,000) after the new
investment As Claudius' portion is to be 20 percent, the new capital balance would be $90,000 ($450,000 × 20%) Because $100,000 was paid, a bonus of $10,000 is being given to the two original partners based on their profit and loss ratio: Messalina – $6,000 (60%) and Romulus – $4,000 (40%) The increase raises Messalina's capital balance from $210,000 to $216,000 and Romulus's capital balance from $140,000 to $144,000.
10 D ASSIGNMENT OF INCOME
Interest—10% of
beginning capital $ 6,000 $ 8,000 $10,000 $24,000 Salary 20,000 20,000
Allocation of remaining income
($6,000 divided on a 3:3:4 basis) 1,800 1,800 2,400 6,000
Totals $ 7,800 $29,800 $12,400 $50,000 STATEMENT OF CAPITAL
Beginning capital $60,000 $80,000 $100,000 $240,000
Drawings (given) (5,000) (5,000) (5,000) (15,000) Ending capital $62,800 $104,800 $107,400 $275,000
11 A ASSIGNMENT OF INCOME—YEAR ONE
Interest—10% of
beginning capital $11,000 $ 8,000 $11,000 $30,000 Salary 20,000 -0- 10,000 30,000
Allocation of remaining loss
Trang 11($80,000 divided on a 5:2:3 basis) (40,000) (16,000) (24,000) (80,000)
Totals $(9,000) $ (8,000) $ (3,000) $(20,000)
STATEMENT OF CAPITAL—YEAR ONE
Beginning capital $110,000 $80,000 $110,000 $300,000 Net loss (above) (9,000) (8,000) (3,000) (20,000) Drawings (given) (10,000) (10,000) (10,000) (30,000) Ending capital $ 91,000 $62,000 $ 97,000 $250,000
11 (continued)
ASSIGNMENT OF INCOME—YEAR TWO
Interest—10% of
beginning capital $ 9,100 $ 6,200 $ 9,700 $25,000 Salary 20,000 -0- 10,000 30,000
Allocation of remaining loss
($15,000 divided on a 5:2:3 basis) (7,500) (3,000) (4,500) (15,000)
Totals $21,600 $3,200 $15,200 $ 40,000 STATEMENT OF CAPITAL—YEAR TWO
Beginning capital (above) $ 91,000 $62,000 $ 97,000 $250,000
Drawings (given) (10,000) (10,000) (10,000) (30,000) Ending capital $102,600 $55,200 $102,200 $260,000
12 A Costello receives a $10,000 bonus ($100,000 less $90,000 capital balance).
This bonus is deducted from the two remaining partners according to their profit and loss ratio (2:3) A 60 percent (3/5) reduction is assigned to Burns which decreases that partner’s capital balance from $30,000 to $24,000.
13 D Clark receives an additional $10,000 Because Clark receives 20 percent of
profits and losses, this allocation indicates total goodwill of $50,000.
20% of Goodwill = $10,000 Goodwill = $10,000 ÷ 20 = $50,000
Trang 12The above entry raises Manning’s capital from $130,000 to $145,000.
14 B Under the bonus method, Clark’s excess payment is deducted from the remaining partners’ capital accounts according to their relative profit and loss ratios, 3:3:2 Manning’s balance is then $126,250 = $130,000 – $3,750.
15 A The implied value of the company is $900,000 ($270,000 ÷ 30%) Because
the money is going to the partners rather than into the business, the capital total is $490,000 before realigning the balances Hence, goodwill of
$410,000 is recognized based on the implied value ($900,000 – $490,000) This goodwill is assumed to represent unrealized business gains and is attributed to the original partners according to their profit and loss ratio They will then each convey 30 percent ownership of the $900,000 partnership to Darrow for a capital balance of $270,000.
16 D Because the money goes into the business, total capital becomes $740,000
($490,000 + $250,000) Darrow is allotted 30 percent of this total or
$222,000 Because Darrow invested $250,000, the extra $28,000 is assumed
to be a bonus to the original partners Jennings will be assigned 40 percent
of this extra amount or $11,200 This bonus increases Jennings’ capital from $160,000 to $171,200.
17 (10 Minutes) (Compute capital balances under both goodwill and bonus methods)
a Goodwill Method
Implied value of partnership ($80,000 ÷ 40%) $200,000 Total capital after investment ($70,000 + $40,000 + $80,000) 190,000 Goodwill $ 10,000 Goodwill to Hamlet (7/10) $ 7,000 Goodwill to MacBeth (3/10) $ 3,000 Hamlet, capital (original balance plus goodwill) $ 77,000
Lear, capital (payment) (40% of total capital) $ 80,000
Trang 13b Bonus Method
Total capital after investment ($70,000 + 40,000 + $80,000) $190,000 Ownership portion—Lear 40% Lear, capital $ 76,000
Bonus to Hamlet (7/10) $ 2,800 Bonus to MacBeth (3/10) $ 1,200 Hamlet, capital (original balance plus bonus) $ 72,800 MacBeth, capital (original balance plus bonus) $ 41,200 Lear, capital (40% of total capital) $ 76,000 18.(15 Minutes) (Prepare journal entries to record admission of new partner under both the goodwill and the bonus methods)
Part a.
Total capital is $300,000 ($85,000 + $60,000 + $55,000 + $100,000) after the new investment As Sergio's portion is 25 percent, this partner's capital balance would be $75,000 Because $100,000 was paid, a bonus of $25,000
is given to the three original partners based on their profit and loss ratio: Tiger—$12,500 (50%), Phil—$7,500 (30%), and Ernie—$5,000 (20%).
Cash 100,000
Sergio, capital 75,000 Tiger, capital 12,500 Phil, capital 7,500 Ernie, capital 5,000
Part b.
Total capital is $260,000 ($85,000 + $60,000 + $55,000 + $60,000) after the new investment As Sergio's portion is 25 percent, this partner's capital balance is $65,000 Because only $60,000 was paid, a bonus of $5,000 is taken from the three original partners based on their profit and loss ratio: Tiger—$2,500 (50%), Phil—$1,500 (30%), and Ernie—$1,000 (20%).
Trang 14Part c.
Total capital is $272,000 ($85,000 + $60,000 + $55,000 + $72,000) after the new investment However, the implied value of the business based on the new investment is $288,000 ($72,000 ÷ 25%) Consequently, goodwill of
$16,000 must be recognized with the offsetting allocation to the original partners based on their profit and loss ratio: Tiger—$8,000 (50%), Phil—
$4,800 (30%), and Ernie—$3,200 (20%).
Goodwill 16,000
Tiger, capital 8,000 Phil, capital 4,800 Ernie, capital 3,200 Cash 72,000
The above goodwill balance indicates that Grant's total investment is
$90,000 (cash of $80,000 and goodwill of $10,000) A $90,000 contribution raises the total capital to $500,000 so that Grant does, indeed, have an 18 percent interest ($90,000 ÷ $500,000).
CAPITAL BALANCES:
Nixon $200,000 Hoover 120,000 Polk 90,000 Grant 90,000
Trang 15Part b.
Total capital is $510,000 ($200,000 + $120,000 + $90,000 + $100,000) after the new investment As Grant's portion is to be 20 percent, this partner's capital balance will be $102,000 Because only $100,000 was paid, a bonus
of $2,000 is taken from the three original partners based on their profit and loss ratio: Nixon—$1,000 (50%), Hoover—$400 (20%), and Polk—$600 (30%).
—$17,600 (40%).
Goodwill 44,000
Com, capital 26,400 Pack, capital 17,600 Cash 76,000
Hal, capital 76,000 Part b.
Interest $17,640 $12,760 $7,600 $38,000 Remaining loss (1,000) (600) (400) (2,000)
21 (5 Minutes) (Allocation of income to partners)
Trang 16Interest (15% of average capital) 15,000 30,000 45,000 90,000
CALCULATION OF PURKERSON'S INTEREST ALLOCATION
Total $792,000
Months 12
Average monthly capital balance $ 66,000
Interest rate × 10%
Interest allocation (above) $ 6,600
STATEMENT OF PARTNERS' CAPITAL
23 (30 Minutes) (Allocate income for several years and determine ending capital balances)
INCOME ALLOCATION—2012
Interest (12% of beginning capital) $2,400 $ 7,200 $ 6,000 $ 15,600
Trang 17STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2012
Income allocation (5,280) (17,600) (7,120) (30,000) Drawings (10,000) (10,000) (10,000) (30,000)
INCOME ALLOCATION—2013
Interest(12% of beginning capital above) *$566 $3,888 $3,946 $ 8,400
Remaining income/loss:
$20,000
(8,400) (20,000)
*Rounded
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2013
Interest (12% of beginning capital
Trang 18$11,360 2,272 4,544 4,544 11,360 Totals $14,844 $16,155 $9,001 $40,000
*Rounded
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2014
20% of Goodwill = $30,000
.20 G = $30,000
G = $150,000
CAPITAL BALANCES AFTER WITHDRAWAL
Original Balance Goodwill Withdrawal Final Balance
25 (10 minutes) (Hybrid method for recording a partner withdrawal)