Chapter 12 - Accounting for Partnerships

Chapter 12
Accounting for Partnerships
QUESTIONS
1.

Under the circumstances described, the death, bankruptcy, or legal inability of a

partner to execute a contract ends a partnership. In addition, if a partnership is
organized for the purpose of completing a specific business project, the partnership
ends when the project is completed. If the business for which the partnership was
organized cannot be completed, but goes on indefinitely, the partnership may be
dissolved at the will of any one of its partners.

2.

Mutual agency means that each partner is an agent of the partnership and can
commit it to contracts that are within the normal scope of its business.

3.

Yes, partners can limit the right of a partner. Such an agreement is binding on
members of the partnership. It is also binding on outsiders who know of the
agreement. However, it is not binding on outsiders who do not know of the
agreement.

4.

No, he does not have this right. A partnership is a voluntary association and
partners have the right to select the people with whom they associate as partners.

5.

If partners agree on the method of sharing incomes, but say nothing of losses, then
any losses are shared in the same manner as income.

6.

The allocation of net income to the partners is reported on the statement of partners'
equity.

7.

Unlimited liability means that the creditors of a partnership have the right to require
each partner to be personally responsible for all debts of the partnership.

8.

All partners in a general partnership have unlimited liability. A limited partnership

includes both general and limited partners, and the limited partners have no
personal liability for partnership debts. Also, the general partners assume the
management duties of the partnership.

9.

George's claim is not valid unless the previously agreed upon method of sharing net
incomes and losses granted George an annual salary allowance of $25,000. Unless
the partnership agreement says otherwise, partners have no claim to a salary
allowance in payment for their services.

12-1

Chapter 12 - Accounting for Partnerships

10. No. Kay is still liable to her former partners for her share of the losses.
11. At all times in the accounting history of a partnership (or any organization), assets
must equal liabilities plus equity. When the assets are converted to cash, any gains
or losses are allocated to the capital accounts of the partners; and when creditors'
claims are paid, assets and liabilities are reduced by equal amounts. Therefore,
when the remaining assets are in the form of cash, the amount of cash must equal
the claims (equity) of the partners.
12. The remaining partners should share the decline in their equities in accordance with
their income-and-loss-sharing ratio.

12-2

Chapter 12 - Accounting for Partnerships

QUICK STUDIES
Quick Study 12-1 (10 minutes)
a. The partnership will need to pay because it is a merchandising firm.
That is, if the vendor knows nothing to the contrary, the vendor can
assume that Davis has the right, because of mutual agency, to bind the
firm to contracts for the purchase of merchandise.
b. A public accounting firm is not in the merchandising business.
Consequently, because the purchase of merchandise to be sold is not
within the normal scope of the business of this firm, the vendor has no
right to assume Davis is acting as the agent for the partnership. Hence,
the partnership probably will not have to pay.

Quick Study 12-2 (10 minutes)

Since Maxi is a limited partner, she is not personally liable for any unpaid
debts of the partnership. Therefore, the partnerships creditors cannot
pursue Maxis personal assets.

Quick Study 12-3 (15 minutes)

Keeley
Net income.............................................
Salary allowances
Keeley .................................................. $ 40,000
Norton ..................................................
Total salary allowances .....................
Balance of income ................................
Balance allocated equally
Keeley .................................................. 70,000
Norton ..................................................
Total allocated equally .......................
Balance of income ................................ _______
Shares of the partners .......................... $110,000

12-3

Norton

Total
$210,000

$ 30,000
70,000
140,000

70,000
_______
$100,000

140,000
$
0

Chapter 12 - Accounting for Partnerships

Quick Study 12-4 (10 minutes)

If Jake is allocated a $60,000 salary allowance and there remains $2,000 to
be divided equally, giving Ness $1,000, then this shows that the partnership
must have earned net income of $62,000.

Quick Study 12-5 (10 minutes)

Cash ........................................................................................... 30,000
Holly, Capital ........................................................................

30,000

To record admission of Holly.

Quick Study 12-6 (10 minutes)

Bogg, Capital ............................................................................. 10,000
Heyer, Capital ............................................................................ 10,000
Mintz, Capital ........................................................................

20,000

To record admission of Mintz by purchase.

Quick Study 12-7 (30 minutes)

1.
Red
$175,000

Initial investments ..............

Allocation of all losses
($600,000 - $60,000)/3 ....... (180,000)
Capital balances ................. $ (5,000)

White
$220,000

Blue
$205,000

Total
$600,000

(180,000)
$ 40,000

(180,000)
$ 25,000

(540,000)
$ 60,000

2. a)
Aug. 31 Cash .......................................................................... 5,000
Red, Capital ........................................................

5,000

To record payment of deficiency.

b)
Aug. 31 White, Capital ...........................................................40,000
Blue, Capital .............................................................25,000
Cash ....................................................................
To distribute remaining cash.

12-4

65,000

Chapter 12 - Accounting for Partnerships

Quick Study 12-7 (Concluded)

3. a)
Aug. 31 White, Capital ........................................................... 2,500
Blue, Capital ............................................................. 2,500
Red, Capital ........................................................

5,000

To transfer deficiency to other partners.

b)
Aug. 31 White, Capital ...........................................................37,500
Blue, Capital .............................................................22,500
Cash ....................................................................

60,000

To distribute remaining cash.

Quick Study 12-8 (15 minutes)

Total partnership return on equity

= Net Income/Average equity

= $50,000 / ($300,000 + $400,000)/2
= $50,000 / $350,000
= 14.3%

Gilson partner return on equity

= Partner net income/Average partner equity

= $40,000 / ($200,000 + $280,000)/2
= $40,000 / $240,000
= 16.7%

Lott partner return on equity

= Partner net income/Average partner equity

= $10,000 / ($100,000 + $120,000)/2
= $10,000 / $110,000
= 9.1%

12-5

Chapter 12 - Accounting for Partnerships

EXERCISES
Exercise 12-1 (20 minutes)
a. Recommended Organization: Milan should consider setting up a limited
partnership. Given his real estate expertise he can manage the day-today activities of the partnership and serve as its general partner. He can
raise the necessary capital by admitting limited partners.
Taxation: All partners will pay individual taxes on income distributed to
them, but the partnership entity will not pay income tax.
Advantages: Advantages to Milan will be authority over the partnership
that he will have as general partner and the ease of raising capital.
b. Recommended Organization:
The two doctors should form a
partnership. A general partnership will have the disadvantage of
unlimited liability so they probably want to consider a limited liability
partnership. The partnership can borrow funds from the bank to obtain
the initial needed capital for the business.
Taxation: The owners will pay individual taxes on income earned by the
partnership but the partnership will not be taxed.
Advantages: The advantages of the partnership are ease of formation
and owner authority.
c. Recommended Organization:
Ross, Jenks, and Keim might first
consider organizing their business as a general partnership. However, a
problem for these new graduates is that they do not have funds and with
no past business experience will probably have trouble getting a
business loan. Therefore, instead of a partnership, a better course of
action is probably to incorporate. In this way they might be able to find
investors to contribute capital for stock. They can structure the
financing so that they remain the major stockholders in the company.
Taxation: As a corporation, any income will be subject to corporate
income tax. Any dividends paid to the stockholders will also normally
be taxed, but at a much lower level. Moreover, some lower income
taxpayers could potentially pay little or no dividend tax. Any salaries
that Ross, Jenks, and Keim pay themselves will be a tax-deductible
expense for the business.
Advantages: Several key advantages to the corporate form include its
limited liability and the potential to sell more stock if additional funds
are needed.

12-6

Chapter 12 - Accounting for Partnerships

Exercise 12-2 (15 minutes)

Characteristic

General Partnerships

1. Ease of formation

Requires only an agreement

2. Transferability of ownership

Difficult to transfer

3. Ability to raise large amounts of capital Low ability

4. Life

Limited

5. Owners liability

Unlimited

6. Legal status

Not separate from partners

7. Tax status of income

Taxed only once

8. Owners authority

Mutual agency

Exercise 12-3 (25 minutes)

1.
Jan. 1

Cash .......................................................................... 14,000

Equipment ................................................................ 66,000
Note Payable ......................................................
A. Kroll, Capital ..................................................

20,000
60,000

To record initial capital investment of Kroll.

2.
Jan. 1

Cash .......................................................................... 25,000

A. Rogers, Capital ..............................................
To record initial capital investment of Rogers.

12-7

25,000

Chapter 12 - Accounting for Partnerships

Exercise 12-4 (25 minutes)

1a. 2011
Mar. 1 Cash .......................................................................... 88,000
Land .......................................................................... 70,000
Building .................................................................... 100,000
Long-Term Notes Payable ................................
Abbey, Capital ....................................................
Dames, Capital ...................................................

80,000
88,000
90,000

To record initial capital investments.

1b. 2011
Oct. 20

Abbey, Withdrawals ................................................. 32,000

Dames, Withdrawals ................................................ 25,000
Cash .....................................................................

57,000

To record partners withdrawals.

1c. 2011
Dec. 31

Abbey, Capital .......................................................... 32,000

Dames, Capital .......................................................... 25,000
Abbey, Withdrawals ...........................................
Dames, Withdrawals ..........................................

32,000
25,000

To close withdrawals accounts.

Dec. 31

Income Summary ..................................................... 79,000

Abbey, Capital ....................................................
Dames, Capital ....................................................
To close Income Summary account.*

2.
Capital account balances
Abbey
Initial investment ................................$ 88,000
Withdrawals ........................................ (32,000)
Share of income* ................................ 54,400
Ending balances .................................$110,400
*Supporting calculations
Abbey
Dames
Net income .................................................................
Salary allowance
Abbey ........................................................................
$30,000
Total salary allowance ...............................................
Balance of income .....................................................
Interest allowances
Abbey (10% on $88,000) ..........................................
8,800
Dames (10% on $90,000)..........................................
$9,000
Total interest allowances...........................................
Balance of income .....................................................
Balance allocated equally
Abbey ........................................................................
15,600
Dames .......................................................................
15,600
Total allocated equally ...............................................
_______
_______
Balance of income .......................................................
Shares of the partners .................................................
$54,400
$24,600

12-8

Dames
$ 90,000
(25,000)
24,600
$ 89,600
Total
$79,000
30,000
49,000

17,800
31,200

31,200
0

54,400
24,600

Chapter 12 - Accounting for Partnerships

Exercise 12-5 (30 minutes)

Cosmo
Plan (1)

$165,000 x 1/2 ...............................................

$82,500

Plan (2)

($50,000/$125,000) x $165,000 .....................

$66,000

Plan (3)

Ellis

Total

$82,500

$165,000

$ 66,000

_______
($75,000/$125,000) x $165,000 .....................

$99,000

99,000

$66,000

$99,000

$165,000

Net income ....................................................

Salary allowances ........................................
$55,000

$165,000
$45,000

100,000

Interest allowances
($50,000 x 10%)...........................................
5,000
($75,000 x 10%)...........................................

5,000
7,500

7,500

Total salary and interest ..............................

112,500

Balance of income ........................................

52,500

Balance allocated equally

($165,000 - $112,500)/2 .................................
26,250

26,250

_______
Balance of income ........................................

_______

Shares of each partner ................................

$86,250

$78,750

12-9

52,500
$

Chapter 12 - Accounting for Partnerships

Exercise 12-6 (35 minutes)

Cosmo
1)

2)

Net income....................................................
Salary allowances ........................................
$55,000
Interest allowances
($50,000 x 10%) ..........................................
5,000
($75,000 x 10%) ..........................................
Total salaries and interest ..........................
Balance of income .......................................
Remainder equally
($94,400 - $112,500)/2 ..................................
(9,050)
Balance of income .......................................
______
Shares each partner ....................................
$50,950
Net income....................................................
Salary allowances ........................................
$55,000
Interest allowances
($50,000 x 10%) ..........................................
5,000
($75,000 x 10%) ..........................................
Total salaries and interest ..........................
Balance of income .......................................
Remainder equally
[$(15,700) - $112,500]/2 ................................
(64,100)
Balance of income .......................................
______
Shares of each partner ................................
$ (4,100)

Ellis

Total

$ 45,000

$ 94,400
100,000

7,500

(9,050)
_______
$ 43,450

$ 45,000

7,500

(64,100)
_______
$(11,600)

5,000
7,500
112,500
(18,100)
18,100
$
0

$ (15,700)
100,000
5,000
7,500
112,500
(128,200)
128,200
$
0

Exercise 12-7 (10 minutes)

Sept. 30

Mona, Capital ............................................................

90,000
Seal, Capital ........................................................
To record admission of Seal.

12-10

90,000

Chapter 12 - Accounting for Partnerships

Exercise 12-8 (25 minutes)

1)
Nov.

Cash ...........................................................................90,000
Ash, Capital .........................................................

90,000

To record admission of Ash

[($510,000 + $90,000) x 15%].

2)
Nov. 1

Cash ..........................................................................
125,000
Ash, Capital ........................................................
Elm, Capital .........................................................
Oak, Capital ........................................................

95,250
23,800
5,950

To record admission of Ash.

Supporting computations
$510,000 + $125,000 = $635,000
$635,000 x 15% = $95,250
$125,000 - $95,250 = $29,750
$29,750 x 80% = $23,800
$29,750 x 20% = $5,950

3)
Nov. 1

Cash ..........................................................................60,000
Elm, Capital ...............................................................20,400
Oak, Capital .............................................................. 5,100
Ash, Capital ........................................................
To record admission of Ash.
Supporting computations
$510,000 + $60,000 = $570,000
$570,000 x 15% = $85,500
$60,000 - $85,500 = $(25,500)
$(25,500) x 80% = $(20,400)
$(25,500) x 20% = $(5,100)

12-11

85,500

Chapter 12 - Accounting for Partnerships

Exercise 12-9 (15 minutes)

1.
Jan. 31

Tulip, Capital .............................................................

180,000
Cash ....................................................................
180,000
To record retirement of Tulip.

2.
Jan. 31

Tulip, Capital .............................................................

180,000
Holland, Capital* .......................................................12,500
Flowers, Capital** ..................................................... 7,500
Cash ....................................................................
200,000
To record retirement of Tulip.
* (5/8 x $20,000)
**(3/8 x $20,000)

3.
Jan. 31

Tulip, Capital .............................................................

180,000
Holland, Capital*.................................................
18,750
Flowers, Capital** ...............................................
11,250
Cash ....................................................................
150,000
To record retirement of Tulip.
* (5/8 x $30,000)
**(3/8 x $30,000)

12-12

Chapter 12 - Accounting for Partnerships

Exercise 12-10 (30 minutes)

a. Loss from selling assets
Total book value of assets .............................................
Total liabilities (before liquidation)................................
$88,000
Total liabilities remaining after paying
proceeds of asset sales to creditors ..........................
(24,000)
Cash proceeds from sale of assets ...............................
Loss on sale of assets* ..................................................

$116,000

(64,000)
$ 52,000

* Alternative computation
1) $24,000 = $88,000 - Cash from assets sale
(This implies cash from assets sale is $64,000)
2) Loss on sale of assets = Book value of assets - Cash received
= $116,000 - $64,000 = $52,000

b. Loss allocation
Capital balances before
loss liquidation
Allocation of loss
$52,000 x 1/10 .......................
$52,000 x 4/10 .......................

Tuttle

Ritter

Lee

Total

$ 1,200

$11,700

$ 15,100

$ 28,000

(26,000)
$(10,900)

(52,000)
$(24,000)

(5,200)

$52,000 x 5/10 ....................... ______

Capital balances after loss ..... $(4,000)

(20,800)
_______
$ (9,100)

c. Liability to be paid
Each partner should pay the amount of the debit (deficit) balance in his
or her own capital account.

12-13

Chapter 12 - Accounting for Partnerships

Exercise 12-11 (30 minutes)

a. Loss from selling assets
Total book value of assets .............................................
Total liabilities before liquidation ..................................$88,000
Total liabilities remaining after paying proceeds
of asset sales to creditors ............................................ (24,000)
Cash proceeds from sale of assets ...............................
Loss on sale of assets ....................................................

$116,000

(64,000)
$ 52,000

b. Loss and deficit allocation

Tuttle
$ 1,200

Ritter
$ 11,700

Lee
$ 15,100

Total
$ 28,000

(20,800)
_______
(9,100)

(26,000)
(10,900)

(52,000)
(24,000)

Allocation of Lee's deficit

to Tuttle and Ritter
$10,900 x 1/5 ......................... (2,180)
$10,900 x 4/5 ......................... ______
(8,720)
Cash paid by each partner
$(6,180) $(17,820)

10,900
$
0

_______
$(24,000)

Capital balances before loss

Allocation of loss
$52,000 x 1/10 ....................... (5,200)
$52,000 x 4/10 .......................
$52,000 x 5/10 ....................... ______
Capital balances after loss ..... (4,000)

c. Liability to be paid
As a limited partner, Lee has no personal liability for the $24,000 liability.
Therefore, Tuttle and Ritter must share the loss reflected in Lee's capital
account deficit.

Exercise 12-12 (20 minutes)

Hunt Sports Enterprises LP:
Return on equity:
$936,064 / [($1,894,000 + $2,730,064)/2]

= 40.5%

Soccer LP:
Partner return on equity:

$44,268 / [($378,000 + $422,268)/2]

= 11.1%

Football LP:
Partner return on equity:

$891,796 / [($1,516,000 + $2,307,796)/2]

= 46.6%

12-14

Chapter 12 - Accounting for Partnerships

PROBLEM SET A
Problem 12-1A (50 minutes)
1.
Dec. 31 Income Summary .....................................................124,500
Kim Ries, Capital ...............................................
Tere Bax, Capital ...............................................
Josh Thomas, Capital .......................................

41,500
41,500
41,500

To close Income Summary.

2.
Dec. 31

Income Summary .....................................................124,500

Kim Ries, Capital ...............................................
Tere Bax, Capital ...............................................
Josh Thomas, Capital .......................................

31,125
43,575
49,800

To close Income Summary*.

*Supporting computations
($40,000/$160,000) x $124,500 = $31,125
($56,000/$160,000) x $124,500 = $43,575
($64,000/$160,000) x $124,500 = $49,800

3.
Dec. 31

Income Summary .....................................................124,500

Kim Ries, Capital ...............................................
Tere Bax, Capital ...............................................
Josh Thomas, Capital .......................................

39,500
36,100
48,900

To close Income Summary*.

*Supporting calculations
Ries
Net income ................................................
Salary allowances
Ries.........................................................
$33,000
Bax..........................................................
Thomas ..................................................
Total salaries ............................................
Balance after salary allowances ..............
Interest allowances
Ries (10% on $40,000) ...........................
4,000
Bax (10% on $56,000) ............................
Thomas (10% on $64,000) .....................
Total interest .............................................
Bal. after interest and salaries .................
Balance allocated equally ........................
2,500
Total allocated equally .............................
Balance of income ....................................
______
Shares of the partners..............................
$39,500

12-15

Bax

Thomas

Total
$124,500

$28,000
$40,000
101,000
23,500

5,600
6,400
16,000
7,500
2,500

2,500

______
$36,100

______
$48,900

7,500
0

Chapter 12 - Accounting for Partnerships

Problem 12-2A (45 minutes)

Preliminary calculations
Plan (a) & Plan (c)

Percentages based on initial investments

Baker = $21,000/$52,500 = 40%
Farney = $31,500/$52,500 = 60%

Plan (b)

Percentages based on time

Baker = 0.5/1.5 = 33 1/3%
Farney = 1.0/1.5 = 66 2/3%

Plan (c) & Plan (d)

Salary allowance
Farney = 12 x $3,000 = $36,000

Plan (d)

Interest allowances
Baker = 10% x $21,000 = $ 2,100
Farney = 10% x $31,500 = $ 3,150

Income (Loss)
Sharing Plan

(a)

(b)

(c)

(d)

Year 1
Calculations

Baker

Farney

40% x $18,000 loss ...................................................

$ (7,200)
60% x $18,000 loss ...................................................

$(10,800)

33 1/3% x $18,000 loss .............................................

$ (6,000)
66 2/3% x $18,000 loss .............................................

$(12,000)

Salary allowance ......................................................

$ 36,000

40% x ($18,000 loss + $36,000 salary) ....................

$(21,600)
________
60% x ($18,000 loss + $36,000 salary) ....................
Totals .........................................................................
$(21,600)

(32,400)
$ 3,600

Salary allowance ......................................................

Interest allowances ..................................................
$ 2,100

$ 36,000
3,150

50% x ($18,000 loss + $36,000

salary + $5,250 interest) .......................................
(29,625)
Totals .........................................................................
$(27,525)

(29,625)
$ 9,525

12-16

Chapter 12 - Accounting for Partnerships

Problem 12-2A (Concluded)

Income (Loss)
Sharing Plan

(a)

(b)

(c)

(d)

(b)

(c)

(d)

Calculations

Baker

Farney

40% x $45,000 income .............................................

$18,000
60% x $45,000 income .............................................

$27,000

33 1/3% x $45,000 income .......................................

$15,000
66 2/3% x $45,000 income .......................................

$30,000

Salary allowance ......................................................

40% x ($45,000 income - $36,000 salary) ...............
$ 3,600
_______
60% x ($45,000 income - $36,000 salary) ...............
Totals .........................................................................
$ 3,600

$36,000

Salary allowance ......................................................

Interest allowances ..................................................
$ 2,100
50% x ($45,000 income - $36,000
salary - $5,250 interest) ........................................
1,875
Totals .........................................................................
$ 3,975

$36,000
3,150

Income (Loss)
Sharing Plan

(a)

Year 2

5,400
$41,400

1,875
$41,025

Year 3
Calculations

Baker

Farney

40% x $75,000 income .............................................

$30,000
60% x $75,000 income .............................................

$45,000

33 1/3% x $75,000 income .......................................

$25,000
66 2/3% x $75,000 income .......................................

$50,000

Salary allowance ......................................................

40% x ($75,000 income - $36,000 salary) ...............
$15,600
_______
60% x ($75,000 income - $36,000 salary) ...............
Totals .........................................................................
$15,600

$36,000

Salary allowance ......................................................

Interest allowances ..................................................
$ 2,100
50% x ($75,000 income - $36,000
salary - $5,250 interest) ........................................
16,875
Totals .........................................................................
$18,975

$36,000
3,150

12-17

23,400
$59,400

16,875
$56,025

Chapter 12 - Accounting for Partnerships

Problem 12-3A (40 minutes)

Part 1
Income (Loss)
Sharing Plan

Calculations

Will

Ron

Barb

Total

(a)

$225,000/3 .............................................................................
$75,000
$75,000

$75,000

$225,000

(b)

$225,000 x ($183,750/$525,000) ..........................................

78,750
$225,000 x ($131,250/$525,000) ..........................................
56,250
$225,000 x ($210,000/$525,000) ..........................................
______ ______
Total allocated ......................................................................
$78,750
$56,250

90,000
$90,000

$225,000

(c)

Net income............................................................................
Salary allowances ................................................................
$40,000
$30,000
Balance of income ...............................................................
Interest allowances
10% x $183,750 ..................................................................
18,375
10% x $131,250 ..................................................................
13,125
10% x $210,000 ..................................................................
Total interest.........................................................................
Bal. of income ......................................................................
Balance allocated ....................................................
19,167 equally
19,167
Balance of income ...............................................................
Shares of partners .................................................
$77,542 partners
$62,292
*

Rounding difference of $1.

12-18

$45,000

$225,000
(115,000)
$110,000

21,000

19,167
$85,167

(52,500)
$57,500
(57,500)*
$
0

Chapter 12 - Accounting for Partnerships

Problem 12-3A (Concluded)

Part 2
BBB PARTNERSHIP
Statement of Partners' Equity
For Year Ended December 31
Will
Ron
Barb
Beginning capital balances......... $
0
$
0
$
0

Total
$

Plus
Investments by owners ............

183,750

131,250

210,000

Net income
Salary allowances .....................

40,000

30,000

45,000

Interest allowances...................

18,375

13,125

21,000

Balance allocated equally.......

(21,000)

(21,000)

(21,000)

Total net income........................

37,375

22,125

45,000

104,500

Total ....................................................

221,125

153,375

255,000

629,500

Less partners' withdrawals ........

(17,000)

(24,000)

(32,000)

(73,000)

Ending capital balances............... $ 204,125

$ 129,375

$ 223,000

$556,500

525,000

Part 3
Dec. 31

Income Summary .....................................................

104,500
Will Beck, Capital ...............................................
Ron Beck, Capital ...............................................
Barb Beck, Capital..............................................

37,375
22,125
45,000

To close Income Summary.

Dec. 31

Will Beck, Capital .....................................................17,000

Ron Beck, Capital .....................................................24,000
Barb Beck, Capital ....................................................32,000
Will Beck, Withdrawals ......................................
Ron Beck, Withdrawals......................................
Barb Beck, Withdrawals ....................................
To close withdrawals accounts.

12-19

17,000
24,000
32,000

Chapter 12 - Accounting for Partnerships

Problem 12-4A (50 minutes)

Part 1
a)
Feb. 1

Zarcus, Capital ......................................................... 69,000

Getz, Capital .......................................................

69,000

To record admission of Getz.

b)
Feb. 1

Zarcus, Capital ......................................................... 69,000

Swanson, Capital ...............................................

69,000

To record admission of Swanson.

c)
Feb. 1

Zarcus, Capital ......................................................... 69,000

Cash ....................................................................

69,000

To record withdrawal of Zarcus with no bonus.

d)
Feb. 1

Zarcus, Capital ......................................................... 69,000

Goering, Capital* ...................................................... 14,250
Schmit, Capital** ...................................................... 23,750
Cash ....................................................................
107,000
To record withdrawal of Zarcus with bonus.
* ($107,000 - $69,000) x 3/8
**($107,000 - $69,000) x 5/8

e)
Feb. 1

Zarcus, Capital ......................................................... 69,000

Accumulated DepreciationEquipment ............... 11,600
Goering, Capital* ................................................
Schmit, Capital** ................................................
Equipment ..........................................................
Cash ....................................................................
To record withdrawal of Zarcus with bonus to
old partners.
* [$69,000 - ($35,000 - $11,600 + $15,000)] x 3/8.
**[$69,000 - ($35,000 - $11,600 + $15,000)] x 5/8.

12-20

11,475
19,125
35,000
15,000

Chapter 12 - Accounting for Partnerships

Problem 12-4A (Concluded)

Part 2
a)
Feb. 1

Cash .......................................................................... 100,000

Ford, Capital*......................................................
100,000
To record admission of Ford.
*Supporting calculations
$84,000 + $69,000 + $147,000 = $300,000
($300,000 + $100,000) x 25% = $100,000
Thus, no bonus is received or paid.

b)
Feb. 1

Cash ..........................................................................
Goering, Capital ($19,500* x 3/10) ...........................
Zarcus, Capital ($19,500* x 2/10) ............................
Schmit, Capital ($19,500* x 5/10) ............................
Ford, Capital .......................................................

74,000
5,850
3,900
9,750
93,500

To record Fords admission and bonus.

* Supporting calculations
($300,000 + $74,000) x 25% = $93,500
$74,000 - $93,500 = $(19,500)
Thus, a bonus is paid to new partner.

c)
Feb. 1

Cash .......................................................................... 131,000

Goering, Capital ($23,250* x 3/10) ....................
6,975
Zarcus, Capital ($23,250* x 2/10) ......................
4,650
Schmit, Capital ($23,250* x 5/10) ......................
11,625
Ford, Capital .......................................................
107,750
To record admission of Ford and bonus
to old partners.
* Supporting calculations
($300,000 + $131,000) x 25% = $107,750
$131,000 - $107,750 = $23,250
Thus, a bonus is received by old partners.

12-21

Chapter 12 - Accounting for Partnerships

Problem 12-5A (75 minutes)

Note: All entries in this problem are dated May 31.

1.
(a)

(b)

(c)

(d)

Cash ..........................................................................
300,000
Inventory .............................................................
Gain on Sale of Inventory .................................

268,600
31,400

Gain on Sale of Inventory .......................................31,400

Quick, Capital ($31,400 x 3/6) ...........................
Drake, Capital ($31,400 x 2/6) ...........................
Sage, Capital ($31,400 x 1/6) .............................

15,700
10,467
5,233

Accounts Payable ....................................................

122,750
Cash ....................................................................

122,750

Quick, Capital ($46,500+ $15,700)...............................62,200

Drake, Capital ($106,250 + $10,467)............................
116,717
Sage, Capital ($83,500 + $5,233) .............................88,733
Cash* ...................................................................

267,650

*$90,400 + $300,000 - $122,750

2.
(a)

(b)

(c)

(d)

Cash ..........................................................................
250,000
Loss on Sale of Inventory .......................................18,600
Inventory .............................................................

268,600

Quick, Capital ($18,600 x 3/6) ................................. 9,300

Drake, Capital ($18,600 x 2/6) ................................. 6,200
Sage, Capital ($18,600 x 1/6) ................................... 3,100
Loss on Sale of Inventory .................................

18,600

Accounts Payable ....................................................

122,750
Cash ....................................................................

122,750

Quick, Capital ($46,500 - $9,300) ............................37,200

Drake, Capital ($106,250 - $6,200) ..........................
100,050
Sage, Capital ($83,500 - $3,100) ..............................80,400
Cash ....................................................................

217,650

*$90,400 + $250,000 - $122,750

12-22

Chapter 12 - Accounting for Partnerships

Problem 12-5A (Concluded)

3.
(a)

(b)

Cash .......................................................................... 160,000

Loss on Sale of Inventory ....................................... 108,600
Inventory .............................................................

268,600

Quick, Capital ($108,600 x 3/6) ............................... 54,300

Drake, Capital ($108,600 x 2/6) ............................... 36,200
Sage, Capital ($108,600 x 1/6) ................................. 18,100
Loss on Sale of Inventory .................................

108,600

Cash ..........................................................................
Quick, Capital ($46,500 - $54,300) ....................
(c)
(d)

7,800
7,800

Accounts Payable .................................................... 122,750

Cash ....................................................................

122,750

Drake, Capital ($106,250 - $36,200) ........................ 70,050

Sage, Capital ($83,500 - $18,100) ............................ 65,400
Cash* ...................................................................

135,450

*$90,400 + $160,000 + $7,800 - $122,750

4.
(a)

(b)

(c)
(d)

Cash .......................................................................... 125,000

Loss on Sale of Inventory ....................................... 143,600
Inventory .............................................................

268,600

Quick, Capital ($143,600 x 3/6) ............................... 71,800

Drake, Capital ($143,600 x 2/6) ............................... 47,867
Sage, Capital ($143,600 x 1/6) ................................. 23,933
Loss on Sale of Inventory .................................

143,600

Drake, Capital ($25,300 x 2/3) ................................. 16,867

Sage, Capital ($25,300 x 1/3) ................................... 8,433
Quick, Capital ($46,500-$71,800) ..........................

25,300

Accounts Payable .................................................... 122,750

Cash ....................................................................

122,750

Drake, Capital*.......................................................... 41,516

Sage, Capital**.......................................................... 51,134
Cash*** ................................................................

92,650

*$106,250 - $47,867 - $16,867

**$83,500-23,933-8,433
***$90,400 + $125,000 - $122,750

12-23

Chapter 12 - Accounting for Partnerships

PROBLEM SET B
Problem 12-1B (50 minutes)
1.
Dec. 31

Income Summary .....................................................135,000

Matt Albin, Capital .............................................
Ryan Peters, Capital ..........................................
Seth Ramsey, Capital ........................................

45,000
45,000
45,000

To close Income Summary.

2.
Dec. 31

Income Summary .....................................................135,000

Matt Albin, Capital .............................................
Ryan Peters, Capital ..........................................
Seth Ramsey, Capital ........................................

67,500
40,500
27,000

To close Income Summary*.

*Supporting computations
($82,000/$164,000) x $135,000 = $67,500
($49,200/$164,000) x $135,000 = $40,500
($32,800/$164,000) x $135,000 = $27,000

3.
Dec. 31

Income Summary .....................................................135,000

Matt Albin, Capital .............................................
Ryan Peters, Capital ..........................................
Seth Ramsey, Capital ........................................

59,400
44,120
31,480

To close Income Summary*.

*Supporting calculations
Albin
Peters
Ramsey
Total
Net income ................................................
$135,000
Salary allowances
Albin .......................................................
$48,000
Peters .....................................................
$36,000
Ramsey ..................................................
$25,000
Total salaries ............................................
109,000
Balance after salary allowances ..............
26,000
Interest allowances
Albin (10% on $82,000) ..........................8,200
Peters (10% on $49,200) ........................
4,920
Ramsey (10% on $32,800) .....................
3,280
Total interest .............................................
16,400
Bal. after interest and salaries .................
9,600
Balance allocated equally ........................3,200
3,200
3,200
Total allocated equally .............................
9,600
Balance of income ....................................
______
______ ______ $
0
Shares of the partners..............................
$59,400 $44,120 $31,480

12-24

Chapter 12 - Accounting for Partnerships

Problem 12-2B (45 minutes)

Preliminary calculations
Plan (a) & Plan (c)

Percentages based on initial investments

Karto = $52,000/$130,000 = 40%
Black = $78,000/$130,000 = 60%

Plan (b)

Percentages based on time

Karto = 0.333/1.333 = 25%
Black = 1.000/1.333 = 75%

Plan (c) & Plan (d)

Salary allowance
Black = 12 x $2,000 = $24,000

Plan (d)

Interest allowances
Karto = 10% x $52,000 = $5,200
Black = 10% x $78,000 = $7,800

Income (Loss)
Sharing Plan

(a)

(b)

(c)

(d)

Year 1
Calculations

Karto

Black

40% x $18,000 loss ...................................................

$ (7,200)
60% x $18,000 loss ...................................................

$(10,800)

25% x $18,000 loss ...................................................

$ (4,500)
75% x $18,000 loss ...................................................

$(13,500)

Salary allowance ......................................................

40% x ($18,000 loss + $24,000 salary) ....................
$(16,800)
60% x ($18,000 loss + $24,000 salary) ....................
_______
Totals .........................................................................
$(16,800)
Salary allowance ......................................................
Interest allowances ..................................................
$ 5,200
50% x ($18,000 loss + $24,000 salary +
$13,000 interest) ....................................................
(27,500)
Totals .........................................................................
$(22,300)

12-25

$ 24,000
(25,200)
$ (1,200)
$ 24,000
7,800
(27,500)
$ 4,300

Chapter 12 - Accounting for Partnerships

Problem 12-2B (Concluded)

Income (Loss)
Sharing Plan

(a)

(b)

(c)

(d)

(b)

(c)

(d)

Calculations

Karto

Black

40% x $38,000 income .............................................

$15,200
60% x $38,000 income .............................................

$22,800

25% x $38,000 income .............................................

$ 9,500
75% x $38,000 income .............................................

$28,500

Salary allowance ......................................................

40% x ($38,000 income - $24,000 salary) ..............
$ 5,600
60% x ($38,000 income - $24,000 salary) ...............
______
Totals .........................................................................
$ 5,600

$24,000

Salary allowance ......................................................

Interest allowances ..................................................
$ 5,200
50% x ($38,000 income - $24,000 salary $13,000 interest) .................................................... 500
Totals .........................................................................
$ 5,700

$24,000
7,800

Income (Loss)
Sharing Plan

(a)

Year 2

8,400
$32,400

500
$32,300

Year 3
Calculations

Karto

Black

40% x $94,000 income .............................................

$37,600
60% x $94,000 income .............................................

$56,400

25% x $94,000 income .............................................

$23,500
75% x $94,000 income .............................................

$70,500

Salary allowance ......................................................

40% x ($94,000 income - $24,000 salary) ...............
$28,000
_______
60% x ($94,000 income - $24,000 salary) ...............
Totals .........................................................................
$28,000

$24,000

Salary allowance ......................................................

Interest allowances ..................................................
$ 5,200
50% x ($94,000 income - $24,000 salary $13,000 interest) ....................................................
28,500
Totals .........................................................................
$33,700

$24,000
7,800

12-26

42,000
$66,000

28,500
$60,300

Chapter 12 - Accounting for Partnerships

Problem 12-3B (30 minutes)

Part 1
Income (Loss)
Sharing Plan

Calculations

Cook

Xi

Schwartz

Total

$40,000

$40,000

$120,000

$120,000 x ($108,000/$240,000) .................... $54,000

_______ _______
$120,000 x ($60,000/$240,000) ......................
$54,000
Total allocated ...............................................
$36,000

$30,000
$30,000

$120,000

(a)

$120,000/3 ......................................................
$40,000

(b)

$120,000 x ($72,000/$240,000) ......................

$36,000

(c)

Net income .....................................................

Salary allowances .........................................
$20,000
Balance of income.........................................
Interest allowances:
12% x $72,000 .............................................
8,640
12% x $108,000 ...........................................
12% x $60,000 .............................................
Total interest ..................................................
Balance of income.........................................
Balance allocated equally .............................
5,400
Balance of income.........................................
______
Shares of partners.........................................
$34,040

12-27

$15,000

$40,000

$120,000
(75,000)
$ 45,000

12,960
7,200

5,400
______
$33,360

5,400
_______
$52,600

(28,800)
$ 16,200
(16,200)
$
0

Chapter 12 - Accounting for Partnerships

Problem 12-3B (Concluded)

Part 2
CXS PARTNERSHIP
Statement of Partners Equity
For Year Ended December 31
Cook
Xi
Schwartz
Beginning capital balances .......... $
0
Plus
Investments by owners.............. 72,000
Net income
Salary allowances ....................... 20,000

Total
$

108,000

60,000

15,000

40,000

12,960

7,200

(20,000)

(20,000)

8,640

7,960

27,200

43,800

Total...................................................... 80,640

115,960

87,200

283,800

Interest allowances.....................

8,640

Balance allocated equally......... (20,000)

Total net income ...........................

Less partner withdrawals..............

(9,000)

Ending capital balance................... $ 71,640

(19,000)
$ 96,960

(12,000)
$ 75,200

240,000

(40,000)
$243,800

Part 3
Dec. 31

Income Summary ..................................................... 43,800

Cook, Capital ......................................................
Xi, Capital ...........................................................
Schwartz, Capital ...............................................

8,640
7,960
27,200

To close Income Summary.

Dec. 31

Cook, Capital ............................................................ 9,000

Xi, Capital ................................................................. 19,000
Schwartz, Capital ..................................................... 12,000
Cook, Withdrawals ............................................
Xi, Withdrawals ..................................................
Schwartz, Withdrawals ......................................
To close withdrawals accounts.

12-28

9,000
19,000
12,000

Chapter 12 - Accounting for Partnerships

Problem 12-4B (50 minutes)

Part 1
a)
Apr. 30

Gibbs, Capital ........................................................... 303,000

Brady, Capital .....................................................
303,000
To record admission of Brady.

b)
Apr. 30

Gibbs, Capital ........................................................... 303,000

Cannon, Capital...................................................
303,000
To record admission of Cannon.

c)
Apr. 30

Gibbs, Capital ........................................................... 303,000

Cash ....................................................................
303,000
To record withdrawal of Gibbs with no bonus.

d)
Apr. 30

Gibbs, Capital ........................................................... 303,000

Mier, Capital* ...........................................................
25,600
Hill, Capital**.......................................................
102,400
Cash ....................................................................
175,000
To record Gibbss withdrawal and the
bonus to old partners.
* ($303,000 - $175,000) x 1/5
**($303,000- $175,000) x 4/5

e)
Apr. 30

Gibbs, Capital ........................................................... 303,000

Accum. Deprec.Manufacturing Equipment........ 168,000
Mier, Capital* ......................................................
20,400
Hill, Capital**.......................................................
81,600
Manufacturing Equipment ................................
269,000
Cash ....................................................................
100,000
To record withdrawal of Gibbs with
bonus to old partners.
* [$303,000 - ($269,000 - $168,000 + $100,000)] x 1/5
**[$303,000 - ($269,000 - $168,000 + $100,000)] x 4/5

12-29

Chapter 12 - Accounting for Partnerships

Problem 12-4B (Concluded)

Part 2
a)
Apr. 30

Cash .......................................................................... 150,000

Brise, Capital*.....................................................
150,000
To record admission of Brise..
* Supporting calculations
$303,000 + $74,000 + $223,000 = $600,000
($600,000 + $150,000) x 20% = $150,000
Thus, no bonus is received or paid.

b)
Apr. 30

Cash .......................................................................... 98,000

Gibbs, Capital ($41,600* x 5/10) ................................ 20,800
Mier, Capital ($41,600* x 1/10) ................................... 4,160
Hill, Capital ($41,600* x 4/10)..................................... 16,640
Brise, Capital ......................................................
139,600
To record Brises admission and bonus.
* Supporting calculations
($600,000 + $98,000) x 20% = $139,600
$98,000 - $139,600 = $(41,600)
Thus, a bonus is paid to new partner.

c)
Apr. 30

Cash .......................................................................... 213,000

Gibbs, Capital ($50,400* x 5/10) ...........................
25,200
Mier, Capital ($50,400* x 1/10) ..............................
5,040
Hill, Capital ($50,400* x 4/10)................................
20,160
Brise, Capital .......................................................
162,600
To record admission of Brise and bonus
to old partners.
* Supporting calculations
($600,000 + $213,000) x 20% = $162,600
$213,000 - $162,600 = $50,400
Thus, a bonus is received by old partners.

12-30

Chapter 12 - Accounting for Partnerships

Problem 12-5B (75 minutes)

Note: All entries in this problem are dated Jan. 18.

1.
(a)

(b)

(c)

(d)

Cash ..........................................................................
325,000
Equipment ...........................................................
Gain on Sale of Equipment ................................

308,600
16,400

Gain on Sale of Equipment .....................................16,400

Asure, Capital ($16,400 x 2/5) ............................
Ramirez, Capital ($16,400 x 1/5) ........................
Soney, Capital ($16,400 x 2/5) ............................

6,560
3,280
6,560

Accounts Payable ....................................................

171,300
Cash .....................................................................

171,300

Asure, Capital ($150,200 + $6,560) .........................

156,760
Ramirez, Capital ($97,900 + $3,280) .......................
101,180
Soney, Capital ($63,500 + $6,560)...........................70,060
Cash* ....................................................................

328,000

*$174,300 + $325,000 - $171,300

2.
(a)

(b)

(c)

(d)

Cash ..........................................................................
265,000
Loss on Sale of Equipment .....................................43,600
Equipment ...........................................................

308,600

Asure, Capital ($43,600 x 2/5) .................................17,440

Ramirez, Capital ($43,600 x 1/5) ............................. 8,720
Soney, Capital ($43,600 x 2/5) .................................17,440
Loss on Sale of Equipment ................................

43,600

Accounts Payable ....................................................

171,300
Cash .....................................................................

171,300

Asure, Capital ($150,200 - $17,440) ........................

132,760
Ramirez, Capital ($97,900 - $8,720) ........................89,180
Soney, Capital ($63,500 - $17,440) .........................46,060
Cash* ....................................................................

268,000

*$174,300 + $265,000 - $171,300

12-31

Chapter 12 - Accounting for Partnerships

Problem 12-5B (Concluded)

3.
(a)
Cash ..........................................................................
100,000
Loss on Sale of Equipment .....................................
208,600
Equipment ..........................................................
(b)

(c)

(d)

308,600

Asure, Capital ($208,600 x 2/5) ...............................83,440

Ramirez, Capital ($208,600 x 1/5) ...........................41,720
Soney, Capital ($208,600 x 2/5) ...............................83,440
Loss on Sale of Equipment ...............................

208,600

Cash ..........................................................................19,940
Soney, Capital ($63,500 - $83,440) ...................

19,940

Accounts Payable ....................................................

171,300
Cash ....................................................................

171,300

Asure, Capital ($150,200 - $83,440) ........................66,760

Ramirez, Capital ($97,900 - $41,720) ......................56,180
Cash* ...................................................................

122,940

*$174,300 + $100,000 + $19,940 - $171,300

4.
(a)

(b)

(c)

(d)

Cash ..........................................................................75,000
Loss on Sale of Equipment .....................................
233,600
Equipment ..........................................................

308,600

Asure, Capital ($233,600 x 2/5) ...............................93,440

Ramirez, Capital ($233,600 x 1/5) ...........................46,720
Soney, Capital ($233,600 x 2/5) ...............................93,440
Loss on Sale of Equipment ...............................

233,600

Asure, Capital ($29,940 x 2/3) .................................19,960

Ramirez, Capital ($29,940 x 1/3) ............................. 9,980
Soney, Capital ($63,500 - $93,440) ...................

29,940

Accounts Payable ....................................................

171,300
Cash ....................................................................

171,300

Asure, Capital* .........................................................36,800

Ramirez, Capital** ....................................................41,200
Cash*** ................................................................

78,000

* $150,200 - $93,440 - $19,960 **$97,900 - $46,720 - $9,980

***$174,300 +$75,000 - $171,300

12-32

Chapter 12 - Accounting for Partnerships

Serial Problem

SP 12

1. Santana Rey should consider several factors:

a. If Business Solutions continues to earn profits, at a 1:1 ownership,
she will have to share profits equally with her new partner. On the
other hand, at a 4:1 ownership, she will only have to share one-fifth of
the profits with her partner. However, if the business experiences
losses, Santana will be better off if the partner is admitted at the 1:1
level as Santana would absorb less of the loss.
b. At the 1:1 ownership, her partner will have more of a say in how the
business is run, whereas at the 4:1 level, the partner will have less of
a voice in the business.
c. If the partner invests in the business equal to their partnership
interest, there will be more total equity in the business if the partner
invests at the 1:1 level.
d. It would likely be easier to attract a partner if there is a lower amount
of investment required by the new partner at the 4:1 level. On the
other hand, a partner may wish to be more of an equal partner and
might wish to invest at the 1:1 level.
2a.
Jan. 1

Cash .......................................................................... 80,360

New Partner, Capital ...........................................

80,360

To admit a new partner at a 1:1 ownership interest

2b.
Jan. 1

Cash .......................................................................... 20,090

New Partner, Capital ...........................................

20,090

To admit a new partner at a 4:1 ownership interest

($80,360 x 1/4 = $20,090).

3.
Jan. 1

Cash .......................................................................... 20,090

New Partner, Capital ...........................................

20,090

To admit a new partner at a 4:1 ownership interest.

4.

Total capital before admission of partner ......................... $ 80,360

Partner investment ..............................................................
20,090
Total capital after admission of partner ............................ $100,450
New partners equity percentage ($20,090 / $100,450) .....
20%

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Chapter 12 - Accounting for Partnerships

Reporting in Action

BTN 12-1

1. The history states that Mike Lazaridis and Douglas Fregin (friends since
grade school) founded Research In Motion (while both were college
students) in 1984. RIM was originally set up as an electronics
consulting business.
2. At least two differences would be immediately apparent between
Research In Motions corporate income statement and a partnership
income statement. First, in a general partnership, income flows
through to the partners to be reported on their individual tax returns.
Therefore, the income statement for a partnership would not show a
line item for income taxes as Research In Motions does in Appendix A.
Second, a corporate income statement shows earnings per share
figures, whereas a partnership income statement would not report
earnings per share given that no stock is outstanding in a partnership.
Other, less obvious, differences also exist.

3. Specifically, the balance sheet for a partnership would not have the
following accounts as reported in the Research In Motions balance
sheet reproduced in Appendix A:
Income taxes payable
Deferred income tax asset & Deferred income tax liability
Capital stockpreferred shares and common shares
Treasury stock
Retained earnings
Additional paid-in capital
We would also expect a separate Capital account to be reported for
each partner in the equity section of the balance sheet.

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Chapter 12 - Accounting for Partnerships

Comparative Analysis

BTN 12-2

1. Apple was incorporated on January 3, 1977, and Research In Motion

was founded in 1984.

2. Apple achieved about $1,000,000,000 in sales in 1984. Research In

Motion achieved $1,000,000,000 in sales in 2005.

3. Research In Motion was initially publicly traded on the Toronto Stock

Exchange on October 28, 1987, and on the NASDAQ on February 4,
1999. Apples initial public offering occurred on December 12, 1980.

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Chapter 12 - Accounting for Partnerships

Ethics Challenge

BTN 12-3

1. Income allocation per original agreement

Maben

Orlando

Clark

Total

Salary allowance .............. $ 3,000

$ 3,000

$ 3,000

$ 9,000

Per patient charges .........

4,100*

Totals ................................ $ 7,100

*(.10 x 41,000)

12,300**

24,600***

$15,300

$27,600

**(.30 x 41,000)

***(.60 x 41,000)

41,000
$50,000

2. Income allocation per Clarks proposal

Maben

Orlando

Clark

Total

Per patient charges ......... $ 5,000

$15,000

$30,000

$50,000

(.10 x 50,000)

(.30 x 50,000)

(.60 x 50,000)

3. The ethical concern here is that Clark has proposed a change to the
partnership agreement that appears to be only self-serving. It is true
that Clark is the groups largest producer and, therefore, is entitled to
the largest income. However, Clarks proposal does not recognize that a
good portion of Clarks income is due to the patient referrals by the
other partners. If patients are not referred for surgery, then Clarks
income will assuredly decline. The original agreement gives some
credit through the salary allowance to Maben and Orlando for the
referrals.
A potentially fair compromise would be to study the referral patterns of
Maben and Orlando. Through analysis, a dollar value can be assigned
to the average amount of production generated monthly for Clark
through the referrals from the other partners. Note that this controversy
is not likely to subside until facts are gathered to support the fairest
allocation of the partnership income.

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Chapter 12 - Accounting for Partnerships

Communicating in Practice

BTN 12-4

--- STUDY NOTES --ORGANIZATIONS WITH PARTNERSHIP CHARACTERISTICS

I.
II.
III.
IV.

Limited Partnerships
Limited Liability Partnerships
S Corporations
Limited Liability Companies

I. Limited Partnerships
These organizations are identified in its name with the words "Limited
Partnership," or "Ltd.," or "L.P."
A limited partnership has two classes of partners, general and limited. At
least one partner must be a general partner who assumes management
duties and unlimited liability for the debts of the partnership. The limited
partners have no personal liability beyond the amounts they invest in the
partnership.
A limited partnership is managed by the general partner(s). Limited
partners have no active role except as specified in the partnership
agreement.
A limited partnership agreement often specifies unique procedures for
allocating incomes and losses between general and limited partners.
The same basic accounting procedures are used for both limited and
general partnerships.

II. Limited Liability Partnerships

This is identified in its name with the words "Limited Liability Partnership"
or by "LLP."
This type of partnership is designed to protect innocent partners from
malpractice or negligence claims resulting from the acts of another
partner. When a partner provides service resulting in a malpractice claim,
that partner has personal liability for the claim. The remaining partners
who were not responsible for the actions resulting in the claim are not
personally liable for it.
Most states hold all partners personally liable for other partnership debts.
Accounting for a limited liability partnership is the same as for a general
partnership.

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Chapter 12 - Accounting for Partnerships

Communicating in Practice (Concluded)

Continued

III. S Corporations
Certain corporations with 100 or fewer stockholders can elect to be
treated like a partnership for income tax purposes. These corporations are
called Sub-Chapter S or simply "S" corporations. This distinguishes them
from other corporations, called Sub-Chapter C or simply "C" corporations.
"S" corporations provide stockholders with the same limited liability
feature as "C" corporations.
The advantage to an "S" corporation is it
doesn't pay income taxes. If stockholders work for an "S" corporation,
their salaries are treated as expenses of the corporation.
The remaining income or loss of the corporation is allocated to
stockholders for inclusion on their personal tax returns. Except for "C"
corporations having to account for income tax expenses and liabilities,
the accounting procedures are the same for both "S" and "C"
corporations.
IV. Limited Liability Companies
A new form of business organization is the limited liability company. The
names of these businesses usually include the words "Limited Liability
Company" or an abbreviation such as "LLC" or "LC."
This form of business has certain features like a corporation and others
like a limited partnership. The owners, who are called members, are
protected with the same limited liability feature in corporations. While
limited partners cannot actively participate in the management of a limited
partnership, the members of a limited liability company can assume an
active management role.
A limited liability company usually has a limited life.
For income tax purposes, the IRS usually classifies a limited liability
company as a partnership.

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Chapter 12 - Accounting for Partnerships

Taking It to the Net

BTN 12-5

1. The account titles given in the equity section of America First Tax
Exempt Investors, L.P are:
General Partner
Beneficial Unit Certificate Holders
Unallocated deficit of variable interest entities

2. There are 21,842,928 units with a value of $130,482,881 at December 31,

2009.

3. The largest asset held by America First is Buildings and Improvements

with a gross value (before accumulated depreciation) of $100,255,779.
Instructor note: Because of accumulated depreciation, some might answer Net
Real Estate Assets (including Land) of $91,790,893, which would be fine.

12-39

Chapter 12 - Accounting for Partnerships

Teamwork in Action

BTN 12-6

1.
Income (Loss)
Sharing Plan

Calculations

Baker

Warner

Rice

Total

(a)

$600,000/3 ........................................................
$200,000 $200,000

$200,000

$ 600,000

(b)

$600,000 x ($200,000/$1,000,000) .......................

$120,000
$600,000 x ($300,000/$1,000,000) .......................$180,000
$600,000 x ($500,000/$1,000,000) .......................
_______ _______
Total allocated .................................................
$120,000 $180,000

$300,000
$300,000

$ 600,000

(c)

(d)

Net income .......................................................

Salary allowances............................................
$ 50,000 $ 60,000
Balance of income .................................
Equally($420,000/3) ..............................
140,000
140,000
Balance of Income .................................
Total Allocated .......................................
$190,000 $200,000
Net Income .............................................
Interest allowances:
10% x $200,000 ...................................
$ 20,000
10% x $300,000 ...................................
10% x $500,000 ...................................
Total interest ..........................................
Balance of income .................................
Balance allocated equally .....................
166,666
Balance of income .................................
_______
Shares of partners .................................
$186,666

$ 70,000
140,000

$ 600,000
(180,000)
420,000
(420,000)
$
0

$210,000
$ 600,000

$ 30,000
$ 50,000

166,667
_______
$196,667

166,667
_______
$216,667

(100,000)
500,000
(500,000)
$
0

2. Team members share solutions.

3. Answers will vary by team. One additional income sharing basis would
be to share income based on time worked in the partnership.

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Chapter 12 - Accounting for Partnerships

4.

Entrepreneurial Decision

BTN 12-7

1. Chance, Lynn, and their future partners would be wise to construct an

agreement that includes the following:
a) names (reputations) and contributions
b) rights and duties
c) income and loss sharing agreement
d) withdrawal agreement
e) dispute procedures
f) admission and withdrawal of new partners
g) rights and duties in the event a partner dies.

2. The partnership form of business organization will have several

advantages for Chance, Lynn, and their partners. Three of these
include: (a) The partnership form will allow active involvement by all
partners. (b) The partnership will be relatively easy to form. (c) The
partnership itself will not pay taxes.

3. Several disadvantages exist with the partnership form of organization.

Three of these include: (a) The greatest disadvantage is that each
partner has unlimited liability for the partnerships debts. (b) The life of
a partnership is limited and a death or termination by either partner will
end the partnership. (c) Mutual agency exists for partnerships so an act
by one partner can commit or bind the other partner.

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Chapter 12 - Accounting for Partnerships

Global Decision

BTN 12-8

1. The company is over 145 years old and was formed as Nokia
Corporation in 1967 with the merger of three Finnish companies.
2. Nokia Corporation was organized under the laws of the Republic of
Finland in 1967 with the merger of Nokia AB, Finnish Rubber Works Ltd,
and Finnish Cable Works Ltd.
3. The companies that are a part of Nokia are:
Nokia Inc
Nokia GmbH
Nokia UK Limited
Nokia TMC Limited
Nokia Telecommunications Ltd
Nokia Finance International B.V.
Nokia Komarom Kft
Nokia India Pvt Ltd
Nokia Italia S.p.A.
Nokia Spain S.A.U.
Nokia Romania SRL
Nokia do Brasil Tecnologia Ltda
000 Nokia
NAVTEQ Corporation
Nokia Siemens Networks B.V.
Nokia Siemens Networks Oy
Nokia Siemens Networks GmbH & Co KG
Nokia Siemens Networks Pvt. Ltd

12-42