Basic issues in combinations

							Chapter 13
        Partnerships:
  Characteristics, Formation,




 and Accounting for Activities
Characteristics of a Partnership

 • Often governed by the Uniform Partnership Act
   (UPA)
 • Voluntary association of individuals with a
   fiduciary relationship
 • Mutual agency - each partner is an agent for other
   partners and the partnership
 • Legal liability - general or limited partnerships
 • Underlying equity theories - proprietary theory is
   a major influence
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Characteristics of a Partner, continued
 • Articles of partnership - a written partnership
   agreement is advisable
 • Acceptable accounting principles - GAAP or
   OCBOA
 • Not a taxable entity - a conduit to the individual
   partners




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Accounts Used for a Partner’s Capital
Investment
 • Drawing account
      – a temporary account
      – periodically closed to capital accounts
 • Capital account
      – a permanent account




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The Drawing Account Illustrated
            Drawing Account
 Debit                Credit
 Periodic withdrawals Closing of balance to
 of partnership assets partner’s capital
 up to a specified     account
 amount



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The Capital Account Illustrated
               Capital Account
Debit                    Credit
Withdrawals in excess    Initial and subsequent
of a specified amount    investments of capital
Closing of a net debit   Partner’s share of
balance in the           partnership profits
partner’s drawing
account
Partner’s share of
partnership losses

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Division of Profits
 • According to a ratio/percentage - assumed
   to be equal if not otherwise stated, and/or
 • According to capital investments of the
   partners - important to define how capital
   is measured and/or
 • According to the labor/service rendered by
   partners - typically involving a salary
   and/or bonus

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Basic Schedule for Allocating Profits
                              Partner
                       A         B       C        Total
Interest on Capital $5,000       -     $2,000   $7,000
Salary               25,000   $35,000   5,000   65,000
Bonus                  -       10,000    -      10,000
  Subtotal          $30,000   $45,000 $7,000 $82,000
Remaining Profit     11,200    11,200   5,600   28,000
  Profit Allocation $41,200   $56,200 $12,600 $110,000


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Allocation of Profit Deficiencies and
Losses
 • Completely satisfy all provisions of the
   profit and loss agreement and use the profit
   and loss ratios to absorb any deficiency or
   additional loss caused by such action or
 • Satisfy each of the provisions to whatever
   extent is possible.
      – for example, the allocation of salaries would be
        satisfied to whatever extent possible before the
        allocation of interest is begun

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Basic Schedule for Allocating
Deficiencies and Losses
                                        Partner
                                  A        B          C          Total
Interest on Capital            $ 5,000     -       $ 2,000 $ 7,000
Salary                          25,000 $35,000        5,000    65,000
Bonus                             -        -          -         -
  Subtotal                     $30,000 $35,000     $ 7,000 $ 72,000
Deferring vs. Remaining Profit (36,800) (36,800)    (18,400) (92,000)
  Profit Allocation            $(6,800) $(1,800)   $(11,400) $(20,000)


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Tax Basis of a Partner’s Interest
                                             Partner
 Assumptions:                              A          B
  Tax basis of assets to be contributed $100,000   $120,000
  Tax basis of liabilities                40,000     70,000
  Profit and loss percentages                30%        70%




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Tax Basis of a Partner’s Interest,
continued
Basis Calculation:                                     A           B
+ Tax basis of assets contributed                   $100,000    $120,000
+ Tax basis of other partner's liabilities assumed    21,000      28,000
- Tax basis of liabilities assumed by other partners (28,000)    (21,000)
= Tax basis of partner's interest                    $93,000    $127,000




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Subsequent Changes in a Partner’s
Tax Basis
Factors Increasing Basis:
• Additional contributions of individual assets
• The partner’s share (based on profit and loss ratios) of
  increases in partnership liabilities resulting from:
   – assuming partners’ personal liabilities
   – direct liabilities of the partnership
• The partner’s share of partnership taxable income
• The partner’s share of separately identified items of
  income not included in tax income (loss)

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Subsequent Changes in a Partner’s
Tax Basis, continued
Factors Decreasing Basis:
• Distribution of partnership assets
• The portion of the partner’s additional personal liabilities
  assumed by the partnership
• The partner’s share of partnership tax losses
• The partner’s share of separately identified items of loss
  not included in taxable income (loss)




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Alternative Organizational Forms
 • Subchapter S Corporations
 • Limited Liability Corporations
 • Limited Liability Partnerships




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