After completing this chapter you should be able to: Identify characteristics of partnerships and similar organizations, compute partner return on equity and use it to evaluate partnership performance, prepare entries for partnership formation, allocate and record income and loss among partners,...
Chapter 12 Accounting for Partnerships PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA McGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights reserved 12 2 C 1 Partnership Form of Organization Voluntary Voluntary Association Association Partnership Partnership Agreement Agreement Limited Limited Life Life Taxation Taxation Mutual Mutual Agency Agency CoCoOwnership Ownership of of Property Property Unlimited Unlimited Liability Liability 12 3 C 1 Organizations with Partnership Characteristics Limited Limited Partnerships Partnerships (LP) (LP) •• General General partners partners assume assume management management duties duties and and unlimited unlimited liability liability for for partnership partnership debts debts •• Limited Limited partners partners have have no no personal personal liability liability beyond beyond invested invested amounts amounts Limited Limited Liability Liability Partnerships Partnerships (LLP) (LLP) •• Protects Protects innocent innocent partners partners from from malpractice malpractice or or negligence negligence claims claims •• Most Most states states hold hold all all partners partners personally personally liable liable for for partnership partnership debts debts Limited Limited Liability Liability Corporations Corporations (LLC) (LLC) •• Owners Owners have have same same limited limited liability liability feature feature as as owners owners of of aa corporation corporation •• A A limited limited liability liability corporation corporation typically typically has has aa limited limited life life 12 4 C 1 Choosing a Business Form Many Many factors factors should should be be considered considered when when choosing choosing the the proper proper business business form form 12 5 P 1 Organizing a Partnership Partners can invest both assets and liabilities in the partnership Assets and liabilities are recorded at an agreedupon value, normally fair market value Asset contributions increase the partner’s capital account Withdrawals from the partnership decrease the partner’s capital account 12 6 P 1 Organizing a Partnership In In accounting accounting for for partnerships: partnerships: 1.Partners Partners’’ withdrawals withdrawals are are debited debited to to their their own own separate separate withdrawals withdrawals account account 2.Partners Partners’’ capital capital accounts accounts are are credited credited (or (or debited) debited) for for their their shares shares of of net net income income (or (or net net loss) loss) when when closing closing the the accounts accounts at at the the end end of of the the period period 3.Each Each partner partner’s ’s withdrawal withdrawal account account is is closed closed to to that that partner’s partner’s capital capital account account Separate Separate capital capital and and withdrawals withdrawals accounts accounts are are kept kept for for each each partner partner 12 7 P 1 Organizing a Partnership On 1/11, Kayla Zayn and Hector Perez organize a partnership called BOARDS Zayn’s initial investment is $7,000 cash, $33,000 in boarding facilities, and a note payable for $10,000 on the boarding facilities Perez’s initial investment is $10,000 cash Jan 11 Cash Boarding Facilities Notes Payable K Zayn, Capital 7,000 33,000 10,000 30,000 To record Zayn's initial investment Jan 11 Cash 10,000 H Perez, Capital To record Perez's initial investment 10,000 12 8 P 2 Dividing Income or Loss Partners are not employees of the partnership but are its owners This means there are no salaries reported as expense on the income statement Profits or losses of the partnership are divided on some agreed upon ratio Three frequently used methods to divide income or loss are allocation on: Stated ratios Capital balances Services, capital and stated ratios 12 9 P 2 Allocation on Stated Ratios In the partnership agreement, Zayn is to receive 2/3 and Perez 1/3 of partnership income or loss If the partnership income is $60,000, we will allocate the income to partners as follows: $60,000 × 2/3 = $40,000 12 10 P 2 Allocation on Capital Balances In In their their partnership partnership agreement, agreement, Zayn Zayn and and Perez Perez agree agree to to allocate allocate profits profits and and losses losses on on the the basis basis of of their their beginning beginning capital capital balances balances Balance K Zayn, Capital $ 30,000 H Perez, Capital 10,000 Totals $ 40,000 Ratio 75% 25% 100% Dec 31 Income Summary K Zayn, Capital H Perez, Capital Income $ 60,000 60,000 Allocation $ 45,000 15,000 $ 60,000 60,000 To allocate income to partner's capital 45,000 15,000 12 24 P 3 Bonus to New Partner On January 4thth, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $18,000 cash in the partnership Rasheed is to receive a 25% ownership interest in the new partnership Any bonus is attributable to Rasheed’s excellent business skills $18,000 $18,000 $24,000 $24,000 == ($6,000) ($6,000) ìì ẵ ½ == ($3,000) ($3,000) 12 25 P 3 Withdrawal of a Partner A partner can withdraw in two ways: The partner can sell his/her partnership interest to another person The partnership can distribute cash and/or other assets to the withdrawing partner 12 26 P 3 Withdrawal of a Partner At At the the date date of of the the withdrawal withdrawal of of Perez, Perez, the the partners partners have have the the following following capital capital balances: balances: Perez Perez $38,000, $38,000, Zayn Zayn $84,000, $84,000, and and Rasheed Rasheed -$38,000 $38,000 The The partners partners share share income income and and loss loss equally equally Perez Perez is is to to receive receive $38,000 $38,000 cash cash upon upon withdrawal withdrawal from from the the partnership partnership No Bonus 12 27 P 3 Withdrawal of a Partner At At the the date date of of the the withdrawal withdrawal of of Perez, Perez, the the partners partners have have the the following following capital capital balances: balances: Perez Perez $38,000, $38,000, Zayn Zayn $84,000, $84,000, and and Rasheed Rasheed -$38,000 $38,000 The The partners partners share share income income and and loss loss equally equally Perez Perez is is to to receive receive $34,000 $34,000 cash cash upon upon withdrawal withdrawal from from the the partnership partnership Bonus to Remaining Partners Capital balance $ 38,000 Cash settlement 34,000 Bonus 4,000 12 28 P 3 Withdrawal of a Partner At At the the date date of of the the withdrawal withdrawal of of Perez, Perez, the the partners partners have have the the following following capital capital balances: balances: Perez Perez $38,000, $38,000, Zayn Zayn $84,000, $84,000, and and Rasheed Rasheed -$38,000 $38,000 The The partners partners share share income income and and loss loss equally equally Perez Perez is is to to receive receive $40,000 $40,000 cash cash upon upon withdrawal withdrawal from from the the partnership partnership Bonus to Withdrawing Partner Capital balance $ 38,000 Cash settlement 40,000 Deficiency 2,000 12 29 P 3 Death of a Partner A A partner partner’s ’s death death dissolves dissolves aa partnership partnership A A deceased deceased partner’s partner’s estate estate is is entitled entitled to to receive receive his his or or her her equity equity The The partnership partnership agreement agreement should should contain contain provisions provisions for for settlement settlement These These provisions provisions usually usually require: require: 1.Closing Closing the the books books to to determine determine income income or or loss loss since since the the end end of of the the previous previous period, period, and and 2.Determining Determining and and recording recording current current market market values values for for both both assets assets and and liabilities liabilities Settlement Settlement of of the the deceased deceased partner partner’s ’s estate estate can can involve involve selling selling the the equity equity to to remaining remaining partners partners or or to to an an outsider, outsider, or or itit can can involve involve withdrawal withdrawal of of assets assets 12 30 P 3 Liquidation of a Partnership A partnership dissolution requires four steps: Noncash assets are sold for cash and a gain or loss on liquidations is recorded Gain or loss on liquidation is allocated to partners using their income-and-loss ratio Liabilities are paid or settled Any remaining cash is distributed to partners based on their capital balances 12 31 P 4 No Capital Deficiency No capital deficiency means that all partners have a zero or credit balance in their capital accounts Zayn, Zayn, Perez Perez and and Rasheed Rasheed agree agree to to dissolve dissolve their their partnership partnership The The only only outstanding outstanding liability liability is an an account payable of $20,000 Prior to dissolution dissolution the the partnership partnership has the the following following balance sheet: sheet: Cash Land $ $ BOARDS' Balance Sheet At January 15, 2011 178,000 Accounts payable $ 20,000 40,000 K Zayn, Capital 70,000 H Perez, Capital 66,000 T Rasheed, Capital 62,000 218,000 $ 218,000 12 32 P 4 No Capital Deficiency BOARDS’ BOARDS’ begins begins the the dissolution dissolution process process by selling the land land for $46,000 cash cash The The gain gain on on the the sale sale of of the the land is distributed equally equally among among the the partners partners After After the the sale sale of of the the land land the the company company pays pays the the account account payable payable Jan 15 Cash Land K Zayn, Capital H Perez, Capital T Rasheed, Capital 46,000 40,000 2,000 2,000 2,000 To record sale of land Jan 15 Accounts payable Cash 20,000 To record payment of accounts payable 20,000 12 33 P 4 No Capital Deficiency After After the the sale sale of of land land for for a gain and the payment of the company’s company’s accounts accounts payable, payable, BOARDS’ BOARDS’ has the following balance sheet: Cash BOARDS' Balance Sheet At January 15, 2011 Accounts payable $ $ 204,000 K Zayn, Capital $ 72,000 H Perez, Capital 68,000 T Rasheed, Capital 64,000 $ 204,000 $ 204,000 12 34 P 4 Capital Deficiency Capital Capital deficiency deficiency means means that that at at least least one one partner partner has has aa debit debit balance balance in in his his or or her her capital capital account account at at the the point point of of final final cash cash distribution distribution This This can can arise arise from from liquidation liquidation losses, losses, excessive excessive withdrawals withdrawals before before liquidation, liquidation, or or recurring recurring losses losses in in prior prior periods periods A A partner partner with with aa capital capital deficiency deficiency must, must, ifif possible, possible, cover cover the the deficit deficit by by paying paying cash cash into into the the partnership partnership 12 35 P 4 Capital Deficiency Zayn, Zayn, Perez, and Rasheed Rasheed agree agree to to dissolve dissolve their their partnership partnership Prior Prior to the final final distribution of cash to the partners, Zayn Zayn has has a capital balance balance of of $19,000, $19,000, Perez Perez $8,000, $8,000, and and Rasheed Rasheed ($3,000) ($3,000) Rasheed Rasheed owes owes the the partnership partnership $3,000 $3,000 and and is is able to pay the the amount amount 12 36 P 4 Partner Cannot Pay Deficiency Let’s Let’s use the information from from our our previous previous example example of of aa capital capital deficiency deficiency and and assume assume partners partners divide profit and and losses equally equally Ending capital balances Allocation of $3,000 deficiency Capital balances for dissolution Zayn Perez Rasheed Total $ 19,000 $ 8,000 $ (3,000) $ 24,000 (1,500) (1,500) 3,000 17,500 6,500 24,000 12 37 A 1 Partner Return on Equity Partner return = on equity Balance, Beginning of year Net income (loss) for year Cash distribution Balance, End of year Partner return on equity Partner net income Average partner equity Boston Celtics Total LP I LP II Celtics LP $ 85 $ 122 $ (307) $ 270 216 44 61 111 (48) (48) $ 253 $ 166 $ (246) $ 333 128% 31% NA 37% 216/[(85+253)/2] = 128% 12 38 End of Chapter 12 ... the partner’s capital account 12 6 P 1 Organizing a Partnership In In accounting accounting for for partnerships: partnerships: 1.Partners Partners’’ withdrawals withdrawals are are debited... debited) debited) for for their their shares shares of of net net income income (or (or net net loss) loss) when when closing closing the the accounts accounts at at the the end end of of the the period... record sale of land Jan 15 Accounts payable Cash 20,000 To record payment of accounts payable 20,000 12 33 P 4 No Capital Deficiency After After the the sale sale of of land land for for a gain