Lecture Accounting principles (7th Edition): Chapter 13 – Weygandt, Kieso, Kimmel

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Lecture Accounting principles (7th Edition): Chapter 13 – Weygandt, Kieso, Kimmel

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Chapter 13 - Accounting for partnerships. In this chapter, the learning objectives are: Discuss and account for the formation of a partnership, explain how to account for net income or net loss of a partnership, explain how to account for the liquidation of a partnership.

Accounting Principles, 7th Edition Weygandt • Kieso • Kimmel Chapter 13 Accounting for Partnerships Prepared by Naomi Karolinski Monroe Community College  and Marianne Bradford Bryant College     John Wiley & Sons, Inc. © 2005 CHAPTER 13 ACCOUNTING FOR PARTNERSHIPS   After studying this chapter, you should be  able to: 1 Identify the characteristics of the  partnership form of business organization Explain the accounting entries for the  formation of a partnership 3 Identify the basis for dividing net income or  net loss 4 Describe the form and content of  partnership financial statements Explain the effects of the entries to record  liquidation of a partnership   PARTNERSHIP FORM OF ORGANIZATION STUDY OBJECTIVE • Uniform Partnership Act  – basic rules for the formation and operation  of partnerships in more than 90 percent of  the states – defines a partnership • an association of two or more   persons to carry on as    co­owners of a business for   a profit     CHARACTERISTICS OF PARTNERSHIPS Principal characteristics of a partnership  1 Association of individuals 2 Mutual agency 3 Limited life 4 Unlimited liability 5 Co­ownership of property     PARTNERSHIP CHARACTERISTICS     MUTUAL AGENCY • Mutual agency  – each partner acts on behalf of the partnership  when engaging in partnership business  – act of any partner is binding on all other  partners • (true even when partners act beyond the scope of  their authority, so long as the act appears to be  appropriate for the partnership)     ASSOCIATION OF INDIVIDUALS • Association of individuals  – may be based on as simple an act as a handshake, it is  preferable to state the agreement in writing • A partnership  – legal entity for certain purposes (i.e., property can be owned in  the name of the partnership) – accounting entity for financial reporting purposes • Net income of a partnership – not taxed as a separate entity – each partner’s share of income is taxable at personal tax rates     LIMITED LIFE • Partnerships  – have a limited life – dissolution  •  whenever a partner withdraws or a new partner is  admitted – ends involuntarily  • by death or incapacity of a partner – may end voluntarily  • through acceptance of a new partner or withdrawal of a  partner     UNLIMITED LIABILITY • Unlimited liability –  each partner is personally and individually  liable for all partnership liabilities – creditors’ claims attach first to partnership  assets – if insufficient assets •  claims then attach to the personal resources of any  partner, irrespective of that partner’s capital equity in  the company     CO-OWNERSHIP OF PROPERTY • Partnership Assets  – assets invested in the partnership are owned jointly  by all the partners • Partnership Income or Loss  – co­owned; if the partnership contract does not  specify to the contrary, net income or net loss is  shared equally by the partners     BONUS TO OLD PARTNERS Determine the amount of bonus by subtracting the new  partner’s capital credit from the new partner’s investment.  The  bonus in this case is $30,000 ($80,000 – $50,000) Allocate the bonus to the old partners on the basis of their income ratios Assuming the ratios are Bart, 60% and Cohen, 40%, the allocation is: Bart, $18,000 ($30,000 X 60%) and Cohen, $12,000 ($30,000 X 40%) The entry to record the admission is: 80,000                18,000            12,000            50,000 BONUS TO NEW PARTNER • A bonus to a new partner  – results when the new partner’s investment is  less than his or her capital credit in the firm.  – capital balances of the old partners are  decreased based on their income ratios before  the admission of the new partner BONUS     COMPUTATION OF CAPITAL CREDIT AND BONUS TO NEW PARTNER Lea Eden invests $20,000 in cash for a 25% ownership interest in the Bart-Cohen partnership The calculations for Eden’s capital credit and the bonus are as follows: The entry to record the admission of Eden is as follows:  20,000    9,000    6,000                 35,000 WITHDRAWAL OF A PARTNER STUDY OBJECTIVE • A partner may withdraw  – voluntarily selling his or her equity  – involuntarily by reaching mandatory  retirement age or by dying • Withdrawal of a partner   ­ payment from remaining                                                                                                                                                                                                                                         partners’ personal    assets or PROCEDURES IN PARTNERSHIP WITHDRAWAL     PAYMENT FROM PARTNERS’ PERSONAL ASSETS • The withdrawal of a partner when  payment made from partners’ personal  assets – is the direct opposite of admitting a new  partner who purchases a partner’s interest – is a personal transaction between the partners Partnership Assets     Bye LEDGER BALANCES AFTER PAYMENT FROM PARTNERS’ PERSONAL ASSETS Anne Morz, Mary Nead, and Jill Odom have capital balances of $25,000,  $15,000, and $10,000, respectively, when Morz and Nead agree to buy out  Odom’s interest.  Each of them agrees to pay Odom $8,000 in exchange for  one­half of Odom’s total interest of $10,000. The entry to record the  withdrawal is: 10,000         5,000         5,000 The effect of this entry on the partnership accounts is shown below:     PAYMENT FROM PARTNERSHIP ASSETS Using partnership assets to pay for a withdrawing  partner’s interest decreases both total assets and total  partnership capital In accounting for a withdrawal by payment from  partnership assets: 1) asset revaluations should not be recorded and 2) any difference between the amount paid and the    withdrawing partner’s capital balance should be  considered a bonus to the retiring partner or a  bonus to the remaining partners Bye     Partnership Assets BONUS TO RETIRING PARTNER A bonus may be paid to a retiring partner when: 1 the fair market value of partnership assets is greater  than their book value, 2 there is unrecorded goodwill resulting from the  partnership’s superior earnings record, or 3 the remaining partners are anxious to remove the  partner from the firm BONUS     BONUS TO RETIRING PARTNER The bonus is deducted from the remaining partners’ capital balances on the basis of  their income ratios at the time of the withdrawal.  Terk retires from the RST  partnership and receives a cash payment of $25,000 from the firm.  Terk has a  capital balance of $20,000.  The procedure for determining the bonus to the retiring  partner and the allocation of the bonus to the remaining partners is:  1) Determine the amount of the bonus by subtracting the retiring partner’s capital balance  from the cash paid by the partnership.  The bonus in this case is $5,000 ($25,000 –  $20,000).  2) Allocate the bonus to the remaining partners on the basis of their income ratios.  The ratios of Roman and Sand are 3:2, so the allocation of  the $5,000 bonus is:  Roman $3,000 ($5,000 X 3/5) and Sand $2,000 ($5,000 X 2/5).   The appropriate entry is: 20,000   3,000   2,000                25,000 BONUS TO REMAINING PARTNERS The retiring partner may pay a bonus to the  remaining partners when: 1 recorded assets are overvalued 2 the partnership has a poor earnings record  or 3 the partner is anxious to leave the  partnership BONUS     BONUS TO REMAINING PARTNERS The bonus is allocated (credited) to the capital balances of the remaining partners on the basis of their income ratios Assume that Terk is paid only $16,000 for her $20,000 equity upon withdrawing from the RST partnership In such a case: 1) The bonus to remaining partners is $4,000 ($20,000 – $16,000) 2) The allocation of the $4,000 bonus is: Roman $2,400 ($4,000 X 3/5) and Sand $1,600 ($4,000 X 2/5) The entry to record the withdrawal is: 20,000            2,400        1,600      16,000 DEATH OF A PARTNER   • The death of a partner dissolves the partnership.    But provision generally is made for the surviving  partners to continue operations by purchasing the  deceased partner’s equity from their personal  assets.    • When a partner dies it is necessary to determine     the partner’s equity at the date of death.                      This is done by: 1) determining the net income or loss                           for the year to date, 2) closing the books, and 3) preparing financial statements   DEATH OF A PARTNER   • The surviving partners will agree to either 1) purchase the deceased partner’s equity       from their personal assets or 2) use partnership assets to settle with the       deceased partner’s estate • In both instances, the entries to      record the withdrawal of the    partner are similar to those    presented earlier   COPYRIGHT Copyright Copyright©©2005 2005John JohnWiley Wiley&&Sons, Sons,Inc Inc All Allrights rightsreserved reserved Reproduction Reproductionor or translation translationof ofthis thiswork workbeyond beyondthat thatpermitted permittedininSection Section117 117of ofthe the1976 1976United United States StatesCopyright CopyrightAct Actwithout withoutthe theexpress expresswritten writtenconsent consentof ofthe thecopyright copyrightowner ownerisis unlawful unlawful Request Requestfor forfurther furtherinformation informationshould shouldbe beaddressed addressedto tothe thePermissions Permissions Department, Department,John JohnWiley Wiley&&Sons, Sons,Inc Inc The Thepurchaser purchasermay maymake makeback-up back-upcopies copiesfor for his/her his/herown ownuse useonly onlyand andnot notfor fordistribution distributionor orresale resale The ThePublisher Publisherassumes assumesno no responsibility responsibilityfor forerrors, errors,omissions, omissions,or ordamages, damages,caused causedby bythe theuse useof ofthese these programs programsor orfrom fromthe theuse useof ofthe theinformation informationcontained containedherein herein     .. .CHAPTER 13 ACCOUNTING FOR PARTNERSHIPS   After studying this chapter,  you should be  able to: 1 Identify the characteristics of the  partnership form of business organization Explain the accounting entries for the ... legal entity for certain purposes (i.e., property can be owned in  the name of the partnership) – accounting entity for financial reporting purposes • Net income of a partnership – not taxed as a separate entity – each partner’s share of income is taxable at personal tax rates... • Partnerships  – have a limited life – dissolution  •  whenever a partner withdraws or a new partner is  admitted – ends involuntarily  • by death or incapacity of a partner – may end voluntarily 

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  • Slide 1

  • Slide 2

  • PARTNERSHIP FORM OF ORGANIZATION STUDY OBJECTIVE 1

  • CHARACTERISTICS OF PARTNERSHIPS

  • PARTNERSHIP CHARACTERISTICS

  • MUTUAL AGENCY

  • ASSOCIATION OF INDIVIDUALS

  • LIMITED LIFE

  • UNLIMITED LIABILITY

  • CO-OWNERSHIP OF PROPERTY

  • ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP

  • THE PARTNERSHIP AGREEMENT

  • Which of the following is not a characteristic of a partnership:

  • Slide 14

  • FORMING A PARTNERSHIP STUDY OBJECTIVE 2

  • Slide 16

  • RECORDING INVESTMENTS IN A PARTNERSHIP

  • DIVIDING NET INCOME OR NET LOSS

  • CLOSING ENTRIES

  • Slide 20

  • CLOSING NET INCOME AND DRAWING ACCOUNTS

  • Slide 22

  • INCOME RATIOS STUDY OBJECTIVE 3

  • TYPICAL INCOME-SHARING RATIOS Salaries, Interest and the Remainder on a Fixed Ratio

  • Slide 25

  • INCOME STATEMENT WITH DIVISION OF NET INCOME

  • SALARIES, INTEREST, AND REMAINDER ON A FIXED RATIO

  • TYPICAL INCOME-SHARING RATIOS CAPITAL BALANCES

  • TYPICAL INCOME-SHARING RATIOS BASED ON SALARIES ALLOWANCES

  • The NBC Company reports net income of $60,000. If partners N, B, and C have an income ratio of 50%, 30%, and 20%, respectively, C’s share of net income is:

  • Slide 31

  • PARTNER’S CAPITAL STATEMENT STUDY OBJECTIVE 4

  • OWNER’S EQUITY SECTION OF A PARTNERSHIP BALANCE SHEET

  • LIQUIDATION OF A PARTNERSHIP

  • ACCOUNT BALANCES PRIOR TO LIQUIDATION STUDY OBJECTIVE 5

  • LIQUIDATION OF A PARTNERSHIP NO CAPITAL DEFICIENCY

  • Slide 37

  • Slide 38

  • LEDGER BALANCES BEFORE DISTRIBUTION OF CASH

  • LIQUIDATION OF A PARTNERSHIP DISTRIBUTION OF CASH WITH NO CAPITAL DEFICIENCY

  • LIQUIDATION OF A PARTNERSHIP CAPITAL DEFICIENCY

  • Slide 42

  • Slide 43

  • Slide 44

  • LEDGER BALANCES AFTER PAYING CAPITAL DEFICIENCY

  • Slide 46

  • LEDGER BALANCES AFTER NONPAYMENT OF CAPITAL DEFICIENCY

  • Slide 48

  • APPENDIX

  • ADMISSION OF A PARTNER STUDY OBJECTIVE 6

  • PROCEDURES IN ADDING PARTNERS

  • Slide 52

  • Slide 53

  • LEDGER BALANCES AFTER PURCHASE OF A PARTNER’S INTEREST

  • LEDGER BALANCES AFTER INVESTMENT OF ASSETS

  • COMPARISON OF PURCHASE OF AN INTEREST AND ADMISSION BY INVESTMENT

  • BONUS TO OLD PARTNERS

  • Slide 58

  • Slide 59

  • BONUS TO NEW PARTNER

  • COMPUTATION OF CAPITAL CREDIT AND BONUS TO NEW PARTNER

  • WITHDRAWAL OF A PARTNER STUDY OBJECTIVE 6

  • PROCEDURES IN PARTNERSHIP WITHDRAWAL

  • PAYMENT FROM PARTNERS’ PERSONAL ASSETS

  • LEDGER BALANCES AFTER PAYMENT FROM PARTNERS’ PERSONAL ASSETS

  • PAYMENT FROM PARTNERSHIP ASSETS

  • BONUS TO RETIRING PARTNER

  • Slide 68

  • BONUS TO REMAINING PARTNERS

  • Slide 70

  • DEATH OF A PARTNER

  • Slide 72

  • Slide 73

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