Kế toán, kiểm toán - Chapter 12: Accounting for partnerships

Chapter 12Accounting for PartnershipsPartnership Form of OrganizationPartnership AgreementVoluntary AssociationLimited LifeTaxationUnlimited LiabilityMutual AgencyCo-Ownership of PropertyC 1Organizations with Partnership CharacteristicsLimited Partnerships(LP) General partners assume management duties and unlimited liability for partnership debts. Limited partners have no personal liability beyond invested amounts.Limited Liability Partnerships(LLP) Protects innocent partners from malpractice or negligence claims. Most states hold all partners personally liable for partnership debts.Limited Liability Corporations(LLC) Owners have same limited liability feature as owners of a corporation. A limited liability corporation typically has a limited life.C 1Choosing a Business FormMany factors should be considered when choosing the proper business form.C 1Organizing a PartnershipPartners can invest both assets and liabilities in the partnership.Assets and liabilities are recorded at an agreed-upon value, normally fair market value.Asset contributions increase the partner’s capital account.Withdrawals from the partnership decrease the partner’s capital account.P 1Organizing a PartnershipIn accounting for partnerships:Partners’ withdrawals are debited to their own separate withdrawals account.Partners’ capital accounts are credited (or debited) for their shares of net income (or net loss) when closing the accounts at the end of the period.Each partner’s withdrawal account is closed to that partner’s capital account. Separate capital and withdrawals accounts are kept for each partner.P 1Organizing a PartnershipOn 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. P 1Dividing Income or LossThree frequently used methods to divide income or loss are allocation on:Stated ratios.Capital balances.Services, capital and stated ratios.Partners are not employees of the partnership but are its owners. This means that there are no salaries reported as expense on the income statement. Profits or losses of the partnership are divided on some agreed upon ratio.P 2Allocation 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 = $40,000P 2Allocation on Capital Balances In their partnership agreement, Zayn and Perez agree to allocate profits and losses on the basis of their beginning capital balances.P 2Allocation on Services, Capital, and Stated Ratios Zayn and Perez have a partnership agreement with the following conditions:Zayn receives a $36,000 annual salary allowance and Perez receives an allowance of $24,000. Each partner is allowed an annual interest allowance of 10% on their beginning capital balance.Any remaining balance of income or loss is allocated equally.Net income is $70,000.P 2Allocation on Services, Capital, and Stated Ratios$30,000 × 10% = $3,000$6,000 × ½ = $3,000P 2Allocation on Services, Capital, and Stated Ratios($14,000) × ½ = ($7,000)Now let’s assume that net income is only $50,000.P 2Partnership Financial StatementsDuring 2009, Zayn withdrew $20,000 cash from the partnership and Perez withdrew $12,000. Net income for the year is $70,000.P 2Admission and Withdrawal of PartnersWhen the makeup of the partnership changes, the existing partnership is dissolved.A new partnership may be immediately formed.New partner acquires partnership interest by:Purchasing it from the other partners, orInvesting assets in the partnership.P 3Purchase of Partnership Interest A new partner can purchase partnership interest directly from the existing partners.The cash goes to the partners, not to the partnership. To become a partner, the new partner must be accepted by the current partners.P 3Purchase of Partnership Interest On January 4th, Hector Perez sells one-half of his partnership interest to Tyrell Rasheed for $18,000. Perez gives up a $13,000 recorded interest in the partnership.P 3Investing Assets in a Partnership The new partner can gain partnership interest by contributing assets to the partnership. The new assets will increase the partnership’s net assets. After admission, both assets and equity will increase.P 3Investing Assets in a Partnership On January 4th, Tyrell Rasheed is admitted to the partnership with a payment of $22,000 cash.P 3Bonus to Old or New PartnersBonus to Old PartnersWhen the current value of a partnership is greater than the recorded amounts of equity, the old partners usually require a new partner to pay a bonus when joining.Bonus to New PartnersThe partnership may grant a bonus to a new partner if the business is in need of cash or if the new partner has exceptional talents.P 3Bonus to Old Partners On January 4th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $42,000 cash in the partnership. Rasheed is to receive a 25% ownership interest in the new partnership. Any bonus is attributable to the existing partners and is shared equally.P 3Bonus to Old Partners On January 4th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $42,000 cash in the partnership. Rasheed is to receive a 25% ownership interest in the new partnership. Any bonus is attributable to the existing partners and is shared equally.$42,000 - $30,000 = $12,000 × ½ = $6,000P 3Bonus to New Partner On January 4th, 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.P 3Bonus to New Partner On January 4th, 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.P 3$18,000 - $24,000 = ($6,000) × ½ = ($3,000)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.P 3Withdrawal of a Partner At the date of the withdrawal of Perez, the partners have the following capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed - $38,000. The partners share income and loss equally. Perez is to receive $38,000 cash upon withdrawal from the partnership.No BonusP 3Withdrawal of a Partner At the date of the withdrawal of Perez, the partners have the following capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed - $38,000. The partners share income and loss equally. Perez is to receive $34,000 cash upon withdrawal from the partnership.Bonus to Remaining PartnersP 3Capital balance $ 38,000 Cash settlement 34,000 Bonus 4,000 Times50%Bonus to each partner $ 2,000   Capital balance $ 38,000 Cash settlement 40,000 Deficiency 2,000 Times50%To each partner $ 1,000   Withdrawal of a Partner At the date of the withdrawal of Perez, the partners have the following capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed - $38,000. The partners share income and loss equally. Perez is to receive $40,000 cash upon withdrawal from the partnership.Bonus to Withdrawing PartnerP 3Death of a PartnerA partner’s death dissolves a partnership. A deceased partner’s estate is entitled to receive his or her equity. The partnership agreement should contain provisions for settlement. These provisions usually require:Closing the books to determine income or loss since the end of the previous period, andDetermining and recording current market values for both assets and liabilities.Settlement of the deceased partner’s estate can involve selling the equity to remaining partners or to an outsider, or it can involve withdrawal of assets.P 3Liquidation 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.P 3No Capital Deficiency No capital deficiency means that all partners have a zero or credit balance in their capital accounts.Zayn, Perez and Rasheed agree to dissolve their partnership. The only outstanding liability is an account payable of $20,000. Prior to dissolution the partnership has the following balance sheet:P 4No Capital Deficiency BOARDS’ begins the dissolution process by selling the land for $46,000 cash. The gain on the sale of the land is distributed equally among the partners. After the sale of the land the company pays the account payable.P 4No Capital Deficiency After the sale of land for a gain and the payment of the company’s accounts payable, BOARDS’ has the following balance sheet:P 4Capital Deficiency Capital deficiency means that at least one partner has a debit balance in his or her capital account at the point of final cash distribution. This can arise from liquidation losses, excessive withdrawals before liquidation, or recurring losses in prior periods. A partner with a capital deficiency must, if possible, cover the deficit by paying cash into the partnership.P 4Capital DeficiencyZayn, Perez, and Rasheed agree to dissolve their partnership. Prior to the final distribution of cash to the partners, Zayn has a capital balance of $19,000, Perez $8,000, and Rasheed ($3,000). Rasheed owes the partnership $3,000 and is able to pay the amount.P 4Partner Cannot Pay Deficiency Let’s use the information from our previous example of a capital deficiency and assume partners divide profit and losses equally.P 4Partner Return on Equity Partner returnon equityPartner net incomeAverage partner equity=216/[(85+253)/2] = 128%A 1End of Chapter 12