Kế toán tài chính 2 - Chapter 13: Partnerships

PartnershipsMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 13Learning ObjectivesIdentify the characteristics, advantages, and disadvantages of the partnership form of business.Record partners’ investments of cash and other assets when a partnership is formed.2Copyright © Houghton Mifflin Company. All rights reserved.Learning ObjectivesCompute and record the income or losses that partners share, based on stated ratios, capital balance ratios, and partners’ salaries and interest.Record a person’s admission to or withdrawal from a partnership.Compute the distribution of assets to partners when they liquidate their partnership.3Copyright © Houghton Mifflin Company. All rights reserved.Partnership CharacteristicsObjective 1Identify the principal characteristics, advantages, and disadvantages of the partnership form of business4Copyright © Houghton Mifflin Company. All rights reserved.Partnership an association of two or more persons to carry on as co-owners of a business for profitDefined by the Uniform Partnership Act, which has been adopted by most statesTreated as a separate accounting entity from its ownersLegally, there is no economic separation between a partnership and its owners5Copyright © Houghton Mifflin Company. All rights reserved.Voluntary AssociationA partnership is a voluntary association of individuals rather than a legal entity in itselfTherefore, A partner is responsible under the law for his or her partners’ actions within the scope of the businessA partner has unlimited liability for the debts of the partnershipIt is important to select partners who share the same business objectives6Copyright © Houghton Mifflin Company. All rights reserved.Partnership AgreementTwo or more competent individuals agree to be partners in a common business purposeDoes not have to be in writingGood business practice calls for a written document that clearly states the details of the agreement7Copyright © Houghton Mifflin Company. All rights reserved.Partnership Agreement (cont’d)Important components of a partnership agreement includeName, location, and purpose of businessNames of partners and their respective dutiesThe investments of each partnerMethod of distributing income and lossesProcedures for the admission and withdrawal of partnersWithdrawal of assets allowed by each partnerLiquidation (termination) of the business8Copyright © Houghton Mifflin Company. All rights reserved.Limited LifeThe life of a partnership is dissolved whenA new partner is admittedA partner WithdrawsGoes bankruptIs incapacitatedRetiresDiesThe terms of the partnership agreement are met9Copyright © Houghton Mifflin Company. All rights reserved.Limited Life (cont’d)If the partners want the partnership to continue legally, the partnership agreement can be written to cover these situations For example, a partnership agreement can state that if a partner dies, the remaining partner(s) must purchase the deceased partner's capital at book value from the heirs10Copyright © Houghton Mifflin Company. All rights reserved.Mutual Agency means each partner is an agent of the partnership within the scope of the businessThis means any partner can bind the partnership to a business agreement as long as he or she acts within the scope of the company’s normal operationsBecause of this, it is very important to choose business partners who have integrity and who share the same business objectives11Copyright © Houghton Mifflin Company. All rights reserved.Mutual Agency (cont’d)A partner in a used-car business purchases and sells used carsThe partnership is bound to these business agreements because they fall within the scope of the used-car businessA partner in a used-car business signs a contract to purchase men’s clothingThe partnership is not bound to this agreement because it does not fall within the scope of the used-car business12Copyright © Houghton Mifflin Company. All rights reserved.Unlimited Liabilitymeans that each partner is personally liable for all of the debts of the partnershipAll partners have unlimited liabilityEach partner can be required by law to pay all the debts of the partnership13Copyright © Houghton Mifflin Company. All rights reserved.Unlimited Liability (cont’d)If a partnership cannot pay its debtsCreditors must first satisfy their claims from the assets of the businessIf these assets are not enough to cover all debts, creditors can seek payment from the personal assets of each partnerIf one partner’s assets are used up before complete payment of the debt, creditors can claim additional assets from the remaining partners who are able to pay14Copyright © Houghton Mifflin Company. All rights reserved.Co-ownership of Partnership PropertyProperty invested in a partnership becomes an asset of the partnership and is jointly owned by the partnersPartners give up the right to their separate use of the property15Copyright © Houghton Mifflin Company. All rights reserved.Participation in Partnership IncomeEach partner has the right to share in the company's income and the responsibility to share in its lossesThe partnership agreement should state the method of distributing income and losses to each partnerIf the agreement describes how to distribute income but not losses, the losses are distributed in the same way as incomeIf no method is stated for income or loss distribution, the partners must by law share income and losses equally16Copyright © Houghton Mifflin Company. All rights reserved.Advantages and Disadvantages of PartnershipsAdvantagesEasy to form, change, and dissolveFacilitates the pooling of capital resources and individual talentsHas no corporate tax burdenIs not a legal entity for tax purposesDoes not have to pay federal income taxBut, must file an informational returnGives partners a certain amount of freedom and flexibility17Copyright © Houghton Mifflin Company. All rights reserved.Advantages and Disadvantages of Partnerships (cont’d)DisadvantagesLimited lifeMutual agencyOne partner can bind the partnership to a contractUnlimited personal liabilityMore difficult to raise large amounts of capital and transfer ownership interests than for a corporation18Copyright © Houghton Mifflin Company. All rights reserved.Other Forms of AssociationLimited partnershipsJoint venturesThese two common forms of association are a type of partnership or similar to a partnership19Copyright © Houghton Mifflin Company. All rights reserved.Limited PartnershipA special type of partnership that confines the limited partner’s loss to the amount of his or her investmentOvercomes the unlimited liability disadvantageUsually, a general partner has unlimited liability, but other partners are allowed to limit their potential lossSubject to personal bankruptcy laws20Copyright © Houghton Mifflin Company. All rights reserved.Joint VentureAn association of two or more entities for the purpose of achieving a specific goalMany have an agreed-upon limited lifeEnd when the common goal is achievedUsually involve companies, but can sometimes involve governments, especially in emerging economiesProfits and losses are shared on an agreed-upon basis21Copyright © Houghton Mifflin Company. All rights reserved.DiscussionIs mutual agency considered an advantage or disadvantage of a partnership?Mutual agency means one partner can bind the partnership to a contract, or agreement. This can be a disadvantage if the partner makes binding agreements that are not in the best interest of the partnership. However, it could be difficult to conduct business without mutual agency. For example, it would be impractical to have every partner approve a contract to sell each car on a car lot22Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Partners’ EquityObjective 2Record partners’ investments of cash and other assets when a partnership is formed23Copyright © Houghton Mifflin Company. All rights reserved.Partners’ EquityThe owners’ equity in a partnershipSeparate Capital and Withdrawals accounts are maintained for each partnerWith a sole proprietorship, there is only one Capital account and one Withdrawals accountIncome and losses must be divided among the partners24Copyright © Houghton Mifflin Company. All rights reserved.Partners’ Equity Section of the Balance SheetThe balance of each partner’s Capital account is listed separately25Copyright © Houghton Mifflin Company. All rights reserved.Partners’ Investments in the PartnershipEach partner invests cash, other assets, or both in the partnership According to the partnership agreementNoncash assets should be valued at their fair market value on the date they are transferred to the partnershipTo record the investmentAssets are debited to the proper accountThe total amount is credited to the partner’s Capital account26Copyright © Houghton Mifflin Company. All rights reserved.Recording Partners’ InvestmentsJerry Adcock and Rose Villa have agreed to enter into a partnership to operate a jewelry store. Adcock invests $28,000 in cash and $37,000 worth of furniture and displays. Villa invests $40,000 in cash and $30,000 worth of equipment. Related to the equipment is a $10,000 note payable, which the partnership assumesRecord the partners’ initial investments27Copyright © Houghton Mifflin Company. All rights reserved.Assigning Values to AssetsThe values assigned to assets invested in the partnership should be included in the partnership agreementThese values can differ from those carried on the partners’ personal booksThe book value of Villa’s equipment is not importantThe fair market value of the equipment at time of transfer is important Represents the amount of money Villa has invested in the partnershipThe equipment Rose Villa invested in the partnership had a value of $22,000 on her books. At the date it was invested in the partnership, the equipment had a fair market value of $30,00028Copyright © Houghton Mifflin Company. All rights reserved.DiscussionHow are noncash assets invested in the partnership valued?Noncash assets should be valued at their fair market value on the date they are transferred to the partnership29Copyright © Houghton Mifflin Company. All rights reserved.Distribution of Partnership Income and LossesObjective 3Compute and record the income or losses that partners share, based on stated ratios, capital balance ratios, and partners’ salaries and interest30Copyright © Houghton Mifflin Company. All rights reserved.Partnership Income and Lossescan be distributed according to whatever method the partners specify in the partnership agreement31Copyright © Houghton Mifflin Company. All rights reserved.Partnership Income and Losses (cont’d)Partnership income normally has three componentsInterest on partners’ capitalReturn to the partners for the use of their capitalPartners’ salariesCompensation for services the partners have renderedOther incomeFor any special contributions partners may make to the partnership or risks they may take32Copyright © Houghton Mifflin Company. All rights reserved.Distribution of Income Among PartnersEqual distributionAppropriate if partners contribute equal capital, have similar talents, and spend the same amount of time in the businessUnequal distributionReflects the differences in partners’ contributions to the business33Copyright © Houghton Mifflin Company. All rights reserved.Distribution of Income and Losses Among PartnersAccomplished byUsing stated ratiosUsing capital balance ratiosPaying the partners’ salaries and interest on their capital and sharing the remaining income according to ratiosSalaries and interest are not expenses of the business, rather ways of determining the distribution of net income among partners34Copyright © Houghton Mifflin Company. All rights reserved.Stated Ratiosrepresent the percentage of income or loss distributed to each partnerIf partners contribute unequally to the business, unequal stated ratios can be appropriatePartners’ contributions to the business may be based on the amount of capital invested, as well as the amount of time invested35Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Stated RatiosAdcock and Villa had net income last year of $30,000. Their partnership agreement states that the percentages of income and losses distributed to Jerry Adcock and Rose Villa should be 60 percent and 40 percent, respectivelyCompute each partners’ share of net incomeRecord the entry to show the distribution to the partners36Copyright © Houghton Mifflin Company. All rights reserved.Capital Balance RatiosIf invested capital produces the most income for the partnership, then income and losses may be distributed according to capital balancesRatio may be based onEach partners’ balance at the beginning of the year, orThe average capital balance of each partner during the yearThe partnership agreement must describe the method used37Copyright © Houghton Mifflin Company. All rights reserved.Ratios Based on Beginning Capital BalancesAt the start of the fiscal year, July 1, 20x3, Jerry Adcock, Capital showed a $65,000 balance and Rose Villa, Capital showed a $60,000 balance. Income for the year was $140,000Total partners’ equity in the business was $125,00038Copyright © Houghton Mifflin Company. All rights reserved.Ratios Based on Beginning Capital BalancesAt the start of the fiscal year, July 1, 20x3, Jerry Adcock, Capital showed a $65,000 balance and Rose Villa, Capital showed a $60,000 balance. Income for the year was $140,000Each partners’ beginning balance capital ratio is equal to that partner’s capital balance at the beginning of the year divided by the total partners’ equity at the beginning of the year39Copyright © Houghton Mifflin Company. All rights reserved.Ratios Based on Beginning Capital BalancesAt the start of the fiscal year, July 1, 20x3, Jerry Adcock, Capital showed a $65,000 balance and Rose Villa, Capital showed a $60,000 balance. Income for the year was $140,000The income that each partner should receive is determined by multiplying the total income by each partner’s capital ratio40Copyright © Houghton Mifflin Company. All rights reserved.Ratios Based on Average Capital BalancesInvestments and withdrawals usually change the partners’ capital ratiosThese changes are not considered when beginning capital balances are used to distribute incomeRatios based on average capital balances may be used if partners believe their capital balances will change dramatically during the year41Copyright © Houghton Mifflin Company. All rights reserved. Illustration of Ratios Based on Average Capital BalancesJerry Adcock, CapitalRose Villa, CapitalJerry Adcock, WithdrawalsRose Villa, WithdrawalsThe following T accounts show the activity over the year in Adcock and Villa’s partners’ Capital and Withdrawals accounts7/1/x3 65,0007/1/x3 60,0002/1/x4 8,00011/1/x3 10,0001/1/x4 10,000Examine the changes that have occurred during the year in each partner’s capital balance42Copyright © Houghton Mifflin Company. All rights reserved. Calculate Adcock’s Average Capital BalanceJerry Adcock, CapitalJerry Adcock, WithdrawalsJerry Adcock invested $65,000 into the partnership on July 1, 20x3, and withdrew $10,000 on January 1, 20x47/1/x3 65,0001/1/x4 10,000This means that from July through December, Adcock had $65,000 invested in the partnership and from January through June he had $55,000 invested ($65,000 initial investment – $10,000 withdrawal)43Copyright © Houghton Mifflin Company. All rights reserved. Calculate Adcock’s Average Capital BalanceJerry Adcock, CapitalJerry Adcock, WithdrawalsJerry Adcock invested $65,000 into the partnership on July 1, 20x3, and withdrew $10,000 on January 1, 20x47/1/x3 65,0001/1/x4 10,000Calculate Adcock’s average capital balanceMultiply the beginning balance by the number of months the balance remains unchangedWhen the balance changes, multiply the new balance by the number of months it remains unchangedRepeat for each time the capital balance changes44Copyright © Houghton Mifflin Company. All rights reserved. Calculate Adcock’s Average Capital BalanceJerry Adcock, CapitalJerry Adcock, WithdrawalsJerry Adcock invested $65,000 into the partnership on July 1, 20x3, and withdrew $10,000 on January 1, 20x47/1/x3 65,0001/1/x4 10,000Calculate Adcock’s average capital balanceAdd the totals and divide by 12 months to determine the average capital balance45Copyright © Houghton Mifflin Company. All rights reserved.Calculate Villa’s Average Capital BalanceRose Villa invested $60,000 into the partnership on July 1, 20x3, withdrew $10,000 on November 1, 20x3, and invested an additional $8,000 of equipment on February 1, 20x4This means that from July through November, Villa had $60,000 invested in the partnership, from November through February she had $50,000 invested ($60,000 initial investment – $10,000 withdrawal), and from February through June she had $58,000 invested in the partnership ($50,000 balance + $8,000 investment) Rose Villa, CapitalRose Villa, Withdrawals7/1/x3 60,0002/1/x4 8,00011/1/x3 10,00046Copyright © Houghton Mifflin Company. All rights reserved.Calculate Villa’s Average Capital BalanceRose Villa invested $60,000 into the partnership on July 1, 20x3, withdrew $10,000 on November 1, 20x3, and invested an additional $8,000 of equipment on February 1, 20x4 Rose Villa, CapitalRose Villa, Withdrawals7/1/x3 60,0002/1/x4 8,00011/1/x3 10,000Calculate Villa’s average capital balance47Copyright © Houghton Mifflin Company. All rights reserved.Calculate the Total Average Capital48Copyright © Houghton Mifflin Company. All rights reserved.Determine the Partners’ Average Capital Balance Ratios49Copyright © Houghton Mifflin Company. All rights reserved.Determine the Partners’ Average Capital Balance Ratios50Copyright © Houghton Mifflin Company. All rights reserved.Determine the Partners’ Average Capital Balance Ratios51Copyright © Houghton Mifflin Company. All rights reserved.Calculate the Distribution of IncomeThe income for the year’s operations (July 1, 20x3 to June 30, 20x4) was $140,00052Copyright © Houghton Mifflin Company. All rights reserved.Salaries, Interest, and Stated Ratios represent a method of arriving at an equitable distribution of income or lossNecessary because partners’ contributions to the business are usually not equalPartnership agreement can allow for partners’ salaries, interest on partners’ capital balances, or bothSalariesAllow for differences in services that partners provide the businessInterestAllows for differences in invested capitalStated ratiosUsed to distribute any remaining income or loss53Copyright © Houghton Mifflin Company. All rights reserved.Distributing Income or Loss Using Salaries and Stated RatiosNet income or loss is distributed to partners in the following orderSalariesEach salary is charged to the appropriate partners’ Withdrawal account when paidStated RatiosDistribute any remaining income to the partners according to the agreed upon state ratios54Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Distributing Income or Loss Using Salaries and Stated RatiosAdcock and Villa agree to annual salaries of $8,000 and $7,000, respectively, and to divide any remaining income equally between them. The income for the year’s operations was $140,000$ 8,000$ 7,000(15,000)$125,000($125,000 x .50)62,500($125,000 x .50)62,500(125,000)―$70,500 $69,500 $140,00055Copyright © Houghton Mifflin Company. All rights reserved.Distributing Income or Loss Using Salaries, Interest, and Stated RatiosNet income or loss is distributed to partners in the following orderSalariesEach salary is charged to the appropriate partners’ Withdrawal account when paidInterestDistribute stated interest on each partners’ capital balanceStated RatiosDistribute any remaining income to the partners according to the agreed upon stated ratios56Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Distributing Income or Loss Using Salaries, Interest, and Stated RatiosAdcock and Villa agree to annual salaries of $8,000 and $7,000, respectively, as well as 10 percent interest on their beginning capital balances, and to share any remaining income equally. Income for the year was $140,000$ 8,000$ 7,000(15,000)$125,000($65,000 x .10)6,500($60,000 x .10)6,000(12,500)―$70,500 $69,500 $140,000$112,500($112,500 x .50)56,250($112,500 x .50)56,250(112,500)57Copyright © Houghton Mifflin Company. All rights reserved.Distributing a Negative BalanceProfits may not be enough to cover salaries and interestThe company may have a loss58Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Distributing a Negative BalanceAdcock and Villa agree to annual salaries of $70,000 and $60,000, respectively, as well as 10 percent interest on their beginning capital balances, and to share any remaining income equally. Income for the year was $140,000$70,000$ 60,000(130,000)$ 10,000($65,000 x .10)6,500($60,000 x .10)6,000(12,500)―$75,250 $64,750 $140,000($ 2,500)($2,500 x .50)(1,250)($2,500 x .50)(1,250)2,50059Copyright © Houghton Mifflin Company. All rights reserved.Reporting the Distribution of Income or Losses on the Income StatementThe distribution of net income or losses is shown below the net income figure60Copyright © Houghton Mifflin Company. All rights reserved.DiscussionOscar and Vince share income in their partnership in a 2:1 ratio and each receive salaries of $10,000. Net income for the year is $50,000, before any distributions. How much of the income is distributed to Vince?Salaries are distributed first. Oscar and Vince each receive $10,000, leaving $30,000 ($50,000 - $20,000) to be distributed according to the stated ratios. Vince receives one-third of the remaining $30,000, or $10,000. Therefore, $20,000 ($10,000 salary + $10,000) of the income is distributed to Vince61Copyright © Houghton Mifflin Company. All rights reserved.Dissolution of a PartnershipObjective 4Record a person’s admission to or withdrawal from a partnership62Copyright © Houghton Mifflin Company. All rights reserved.Dissolution of a Partnershipoccurs when there is a change in the original association of partnersAdmission of a new partnerWithdrawal of a partnerDeath of a partner63Copyright © Houghton Mifflin Company. All rights reserved.Dissolution of a PartnershipThe partners lose their authority to continue business as a going concernThe remaining partners can act for the partnership in finishing the affairs of the business or forming a new partnershipIf a new partnership is formed, it will be a new legal and accounting entityDissolution of a partnership does not necessarily mean the business operation is ended or interrupted64Copyright © Houghton Mifflin Company. All rights reserved.Admission of a New Partner The admission of a new partner dissolves the old partnershipA new association has been formedRequires the consent of all the original partners and ratification of a new partnership agreement65Copyright © Houghton Mifflin Company. All rights reserved.Admission of a New Partner (cont’d)Two ways to admit a new partnerPurchasing an interest from one or more of the original partnersInvesting assets in the partnership66Copyright © Houghton Mifflin Company. All rights reserved.Purchasing an Interest from a PartnerIs a personal transaction between the buyer and sellerThe interest purchased must be transferred from the Capital account of the selling partner to the Capital account of the new partner67Copyright © Houghton Mifflin Company. All rights reserved.Purchasing an Interest from a PartnerJerry Adcock decides to sell his interest of $70,000 in Adcock and Villa to Richard Davis for $100,000 on August 31, 20x5. Rose Villa agrees to the saleRecord the sale on the partnership booksNotice the entry records the book value of the equity, not the sale priceThe amount paid is a personal matter between Adcock and Davis and does not affect the assets or liabilities of the firm68Copyright © Houghton Mifflin Company. All rights reserved.Purchasing an Interest from a PartnerJerry Adcock and Rose Villa each decide to sell one half of their interests in Adcock and Villa to Richard Davis for $100,000 on August 31, 20x5. Rose Villa’s interest is $80,000Record the sale on the partnership books69Copyright © Houghton Mifflin Company. All rights reserved.Investing Assets in a PartnershipWhen a new partner invests assets in the partnership, both the partnership assets and partners’ equity increase70Copyright © Houghton Mifflin Company. All rights reserved.Investing Assets in a Partnership (cont’d)Jerry Adcock and Rose Villa agree to allow Richard Davis to invest $75,000 in return for a one-third interest in their partnership. The Capital accounts of Jerry Adcock and Rose Villa are $70,000 and $80,000, respectivelyDavis’s $75,000 investment equals a one-third interest in the firm after the investment is added to the previously existing capital of the partnership One-third interest = $225,000 ÷ 3 = $ 75,00071Copyright © Houghton Mifflin Company. All rights reserved.Investing Assets in a Partnership (cont’d)Jerry Adcock and Rose Villa agree to allow Richard Davis to invest $75,000 in return for a one-third interest in their partnership. The Capital accounts of Jerry Adcock and Rose Villa are $70,000 and $80,000, respectivelyRecord the investment on the partnership books72Copyright © Houghton Mifflin Company. All rights reserved.Bonus to the Old PartnersA new investor is sometimes willing to pay more than the actual dollar interest he or she receives for the partnershipWhen a partnership is very profitable or otherwise advantageousThe excess of the payment over the interest purchased is a bonus to the original partnersMust be distributed according to the method for distributing income and losses73Copyright © Houghton Mifflin Company. All rights reserved.Bonus to the Old PartnersRichard Davis wants to join the firm of Adcock and Villa. He offers to invest $100,000 on December 1, 20x5, for a one-fifth interest in the business and income. The original partners agree to the offerAdcock and Villa Company has operated for several years and the partners’ capital balances and stated ratios for distribution of income and loss are as follows74Copyright © Houghton Mifflin Company. All rights reserved.Bonus to the Old PartnersRichard Davis wants to join the firm of Adcock and Villa. He offers to invest $100,000 on December 1, 20x5, for a one-fifth interest in the business and income. The original partners agree to the offerDavis is willing to pay $100,000 for an $80,000 interest in the partnershipAssign partners’ equity to Richard Davis75Copyright © Houghton Mifflin Company. All rights reserved.Bonus to the Old PartnersRichard Davis wants to join the firm of Adcock and Villa. He offers to invest $100,000 on December 1, 20x5, for a one-fifth interest in the business and income. The original partners agree to the offerCompute the bonus to the original partners76Copyright © Houghton Mifflin Company. All rights reserved.Bonus to the Old PartnersRichard Davis wants to join the firm of Adcock and Villa. He offers to invest $100,000 on December 1, 20x5, for a one-fifth interest in the business and income. The original partners agree to the offerRecord Davis’s admission to the partnership77Copyright © Houghton Mifflin Company. All rights reserved.Bonus to the New PartnerA new partner may be admitted to the partnership by transferring part of the original partners’ capital to the new partner’s Capital accountReasonsAdditional cash required because of financial troubleAdditional cash required to expand the company’s marketsTo bring a unique talent to the company78Copyright © Houghton Mifflin Company. All rights reserved.Bonus to the New PartnerRichard Davis has been invited to join the firm of Adcock and Villa and accepts the offer. Davis invests $60,000 on December 1, 20x5, for a one-fourth interest in the company The original partners are willing to give Davis a $90,000 interest in the partnership for his $60,000 investmentAssign partners’ equity to Richard Davis79Copyright © Houghton Mifflin Company. All rights reserved.Bonus to the New Partner Compute the bonus to the new partnerRichard Davis has been invited to join the firm of Adcock and Villa and accepts the offer. Davis invests $60,000 on December 1, 20x5, for a one-fourth interest in the company 80Copyright © Houghton Mifflin Company. All rights reserved.Bonus to the New PartnerRecord Davis’s admission to the partnershipRichard Davis has been invited to join the firm of Adcock and Villa and accepts the offer. Davis invests $60,000 on December 1, 20x5, for a one-fourth interest in the company 81Copyright © Houghton Mifflin Company. All rights reserved.Withdrawal of a PartnerA partnership is a voluntary associationA partner usually has the right to withdraw at any timeA partnership agreement should describe the procedures to be followed when a partner decides to withdraw or retireAvoids disputes82Copyright © Houghton Mifflin Company. All rights reserved.Withdrawal of a Partner (cont’d)The partnership agreement should specifyWhether an audit will be performedHow the assets will be reappraisedHow a bonus will be determinedBy what method the withdrawing partner will be paid83Copyright © Houghton Mifflin Company. All rights reserved.Alternative Ways for a Partner to WithdrawSell his or her interest To another partnerTo an outsider with the consent of the remaining partnersWithdraw assets Equal to his or her capital balanceLess than his or her capital balanceRemaining partners receive a bonusGreater than his or her capital balanceWithdrawing partner receives a bonus84Copyright © Houghton Mifflin Company. All rights reserved.Alternative Ways for a Partner to Withdraw85Copyright © Houghton Mifflin Company. All rights reserved.Withdrawal by Selling InterestIs a personal transactionDoes not change the partnership assets or the partners’ equity86Copyright © Houghton Mifflin Company. All rights reserved.Withdrawal by Selling Interest to Another PartnerRose Villa wants to withdraw from the partnership. She has agreed to sell her interest to Richard Davis for $110,000 Record the transferDavis has paid Villa from his personal assets The partnership accounting records only show the transfer of Villa’s interest to Davis87Copyright © Houghton Mifflin Company. All rights reserved.Withdrawal by Selling Interest to an OutsiderRose Villa wants to withdraw from the partnership. She has agreed to sell her interest to Judy Jones for $120,000 Record the transferWhether Villa sells to another partner or outsider, the accounting records would show only the transfer of Villa’s interest 88Copyright © Houghton Mifflin Company. All rights reserved.Withdrawal by Removing AssetsA partnership agreement can allow a withdrawing partner to remove assets from the firm equal to his or her capital balance89Copyright © Houghton Mifflin Company. All rights reserved.Withdrawal by Removing AssetsRichard Davis decides to withdraw from Adcock, Villa, and Davis Company. By request of the remaining partners, he agrees to take only $50,000 in cashAccording to the partnership agreement of Adcock, Villa, and Davis, a withdrawing partner can withdraw cash from the firm equal to his or her capital balance. If there is not enough cash, the withdrawing partner must accept a promissory note from the new partnership for the balanceRecord Davis’s withdrawal90Copyright © Houghton Mifflin Company. All rights reserved.Withdrawal by Removing AssetsWhen a withdrawing partner removes assets that represent less than his or her capital balanceThe equity the partner leaves behind is divided among the remaining partners according to their stated ratios Is considered a bonusWhen a withdrawing partner removes assets that represent more than his or her capital balanceThe excess is treated as a bonus to the withdrawing partnerThe remaining partners absorb the bonus according to their stated ratiosAlternate arrangements can be spelled out in the partnership agreement91Copyright © Houghton Mifflin Company. All rights reserved.Death of a PartnerThe partnership dissolvesThe original association has been changedActions to be taken should be stated in the partnership agreement92Copyright © Houghton Mifflin Company. All rights reserved.Death of a PartnerNormally, books are closed and financial statements are preparedDetermines the capital balance of each partner on the date of deathThe partnership agreement may also stipulate the followingConduct an auditAppraise assetsRecord bonusProcedures for settling with the deceased partner’s heirs93Copyright © Houghton Mifflin Company. All rights reserved.Death of a PartnerRemaining partners mayPurchase the deceased partner’s equitySell it to outsidersDeliver specified assets to the estateA new partnership must be formed if the business is to continue94Copyright © Houghton Mifflin Company. All rights reserved.DiscussionSherry Daniels offers to invest $125,000 in the partnership of Jones & Franklin for a one-third interest. The partners agree to the offer. Total partners’ equity in the original partnership is $175,000. What amount of partners’ equity is assigned to Sherry Daniels?Total partners’ equity in the new partnership is $300,000 ($175,000 + $125,000). Sherry Daniels is assigned a one-third interest, which is equal to $100,000 ($300,000 x 1/3)95Copyright © Houghton Mifflin Company. All rights reserved.Liquidation of a PartnershipObjective 5Compute the distribution of assets to partners when they liquidate their partnership96Copyright © Houghton Mifflin Company. All rights reserved.Liquidation of a Partnership is the process of ending the business, selling enough assets to pay the partnership’s liabilities, and distributing any remaining assets among the partnersIs a special form of dissolutionThe business will not continue97Copyright © Houghton Mifflin Company. All rights reserved.Liquidation of a Partnership (cont’d)Usually, the books are adjusted and closed, with the income or loss distributed to the partnersAs the assets are sold, any gain or loss is distributed to the partners according to the stated ratiosAs cash becomes available, it is applied in the following orderOutside creditorsLoans from partnersPartners’ capital balances98Copyright © Houghton Mifflin Company. All rights reserved.Liquidation of a Partnership (cont’d)The process of liquidation can have a variety of outcomes, includingAssets sold for a gainAssets sold for a loss99Copyright © Houghton Mifflin Company. All rights reserved.Illustration of LiquidationThe books have been closed for Adcock, Villa, Davis & Company. The stated ratios of Adcock, Villa, and Davis are 3:3:4, or 30, 30, and 40 percentThe following balance sheet exists before liquidation 100Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Gain on Sale of AssetsThe following transactions took place in the liquidation of Adcock, Villa, Davis & CompanyThe accounts receivable were collected for $35,000The inventory was sold for $110,000The plant assets were sold for $200,000The accounts payable of $120,000 were paidThe gain of $5,000 from the realization of the assets was distributed according to the partners’ stated ratiosThe partners received cash equivalent to the balances of their Capital accountsThese transactions are summarized in the statement of liquidation101Copyright © Houghton Mifflin Company. All rights reserved.Statement of Liquidation Showing Gain on Sale of Assets102Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Gain on Sale of AssetsThe accounts receivable were collected for $35,000The inventory was sold for $110,000103Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Gain on Sale of AssetsThe plant assets were sold for $200,000The accounts payable of $120,000 were paid104Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Gain on Sale of AssetsThe gain of $5,000 from the realization of the assets was distributed according to the partners’ stated ratiosThe realized gain is distributed to the partners according to their stated ratios105Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Gain on Sale of AssetsThe partners received cash equivalent to the balances of their Capital accountsNotice that the cash distributed to the partners is the balance in their respective Capital accountsCash is not distributed according to the partners’ stated ratios106Copyright © Houghton Mifflin Company. All rights reserved.Loss on Sale of AssetsThe partners share the loss on liquidation according to their stated ratiosTwo casesLosses are small enough to be absorbed by the partners’ capital balancesOne partner’s share of the losses is too large for his or her capital balance to absorb107Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Loss on Sale of AssetsThe following transactions took place in the liquidation of Adcock, Villa, Davis & CompanyThe accounts receivable were collected for $40,000 and merchandise inventory and plant assets were sold for $100,000 and $200,000, respectivelyThe accounts payable of $120,000 were paidThe loss of $200,000 from the realization of the assets was distributed according to the partners’ stated ratiosThe partners received cash equivalent to the balances of their Capital accounts108Copyright © Houghton Mifflin Company. All rights reserved.Statement of Liquidation Showing Loss on Sale of Assets109Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Loss on Sale of AssetsThe accounts receivable were collected for $40,000 and merchandise inventory and plant assets were sold for $100,000 and $200,000, respectively110Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Loss on Sale of AssetsThe accounts payable of $120,000 were paid111Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Loss on Sale of AssetsThe loss of $200,000 from the realization of the assets was distributed according to the partners’ stated ratiosThe realized loss is distributed to the partners according to their stated ratios112Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Loss on Sale of AssetsThe partners received cash equivalent to the balances of their Capital accounts113Copyright © Houghton Mifflin Company. All rights reserved.Partner’s Share of Loss Is Greater Than His or Her Capital BalanceThe partner must make up the deficit in his or her Capital account from personal assetsBecause partners are subject to unlimited liability If the partner does not have the cash to cover his or her obligationsThe remaining partners share the loss according to their stated ratiosAll partners have unlimited liability114Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Partner’s Share of Loss Exceeding His or Her Capital BalanceRichard Davis’s share of loss is greater than his Capital balanceAfter the sale of assets and the payment of liabilities, the remaining assets and partners’ equity for Adcock, Villa, Davis & Company are as followsRichard Davis must pay $15,000 into the partnership from personal funds to cover the deficit115Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Partner’s Share of Loss Exceeding His or Her Capital BalanceRichard Davis pays $15,000 cash to the partnership. There is now enough cash to pay Adcock and Villa their capital balances and complete the liquidation116Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Partner’s Share of Loss Exceeding His or Her Capital BalanceRichard Davis does not have the cash to cover his obligation to the partnershipThe remaining partners must share the deficit according to their stated ratios117Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Partner’s Share of Loss Exceeding His or Her Capital BalanceRichard Davis does not have the cash to cover his obligation to the partnershipThe remaining partners must share the deficit according to their stated ratios118Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Partner’s Share of Loss Exceeding His or Her Capital BalanceRichard Davis does not have the cash to cover his obligation to the partnershipThe remaining partners must share the deficit according to their stated ratiosDavis is now liable to Adcock and VillaIf Davis is able to pay his liabilities at some time in the future, Adcock and Villa can collect the amount of Davis's deficit they absorbed119Copyright © Houghton Mifflin Company. All rights reserved.DiscussionUpon liquidation of a partnership, how is any remaining cash distributed to the partners?First, any gains or losses from the sale of the partnership assets are distributed among the partners, based on their stated ratios. Any cash remaining in the partnership is then distributed according to the partners’ balances in their Capital accounts120Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewIdentify the characteristics, advantages, and disadvantages of the partnership form of businessRecord partners’ investments of cash and other assets when a partnership is formed121Copyright © Houghton Mifflin Company. All rights reserved.And FinallyCompute and record the income or losses that partners share, based on stated ratios, capital balance ratios, and partners’ salaries and interestRecord a person’s admission to or withdrawal from a partnershipCompute the distribution of assets to partners when they liquidate their partnership122Copyright © Houghton Mifflin Company. All rights reserved.