Partnerships

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					Partnerships

Chapter 18


               18 - 1
  Learning Objective 1


 Journalizing the entry for
formation of a partnership.




                              18 - 2
      Partnerships

   – an informal agreement

        – easy to form

 – a binding legal agreement

 The Uniform Partnership Act
provides the legal background.
                                 18 - 3
Learning Unit 18-1



Partnership agreements
  should be in writing
to avoid future conflicts
 and misunderstanding.


                            18 - 4
           Learning Unit 18-1

–   profit and loss sharing agreements
–   share of workload
–   provisions for admission to and withdrawal
    from a partnership
–   separate capital and withdrawals account for
    each partner


                                                   18 - 5
          Learning Unit 18-1

Limited life:
 When a partner dies, leaves, or a new
  partner is admitted, the partnership legally
  ends.
Mutual agency:
 The actions of one partner are binding on all
  the other partners.

                                                  18 - 6
          Learning Unit 18-1

Unlimited liability:
 General partners’ personal assets are at risk.


Co-ownership of property:
 All partners share the business assets.




                                                   18 - 7
         Learning Unit 18-1

 On June 1, 200x, Jane Reedy and Bill Burr
  enter into a partnership.
 Reedy invests $9,000 cash plus store
  equipment worth $25,000 with accumulated
  depreciation of $5,000.
 The current appraised value of the
  equipment is $28,000.

                                              18 - 8
         Learning Unit 18-1

 Reedy also invested Accounts Receivable
  of $2,000 with an Allowance for Doubtful
  Accounts of $500.
 The partnership will take on the
  responsibility for a $6,000 note issued
  by Reedy.
 Burr invests $20,000 cash.
 What are the journal entries?
                                             18 - 9
        Learning Unit 18-1

June 1, 200x
Cash                       9,000
Accounts Receivable        2,000
Equipment                 28,000
  Allowance for Doubtful Accounts      500
  Note Payable                       6,000
  J. Reedy Capital                  32,500

                                             18 - 10
   Learning Unit 18-1


June 1, 200x
Cash               20,000
  B. Burr, Capital        20,000




                                   18 - 11
     Learning Objective 2


Calculating a partner’s share of
net income based on fractional
    ratio, beginning capital
  investment, and salary and
      interest allowances.
                                   18 - 12
           Learning Unit 18-2

   How do partners share profit and losses?
–   equally
–   salary allowance
–   interest allowance
–   ratio based on investment
–   capital contribution


                                               18 - 13
          Learning Unit 18-2

  Reedy and Burr agreed to split profit and
  losses as follows:
 60% to Reedy and 40% to Burr


  How do we allocate $80,000 net income for
  the year?
 $80,000 × 60% = $48,000
 $80,000 × 40% = $32,000

                                              18 - 14
      Learning Unit 18-2


December 31, 200x
Income Summary      80,000
  Reedy, Capital             48,000
  Burr, Capital              32,000




                                      18 - 15
         Learning Unit 18-2

  Reedy and Burr agreed to split profit and
  losses as follows:
 A salary allowance of $10,000 to Reedy and
  $15,000 to Burr will be paid.
 Ten percent interest on each partner’s
  capital investment will be paid annually.
 Any remaining net income or loss will be
  shared equally.

                                               18 - 16
           Learning Unit 18-2

                                Reedy     Burr
First 25,000 based on salary   $10,000   $15,000
Sharing based on capital         3,250     2,000
Remainder shared equally        24,875    24,875
Total                          $38,125   $41,875

                                   $80,000


                                              18 - 17
 Learning Objective 3


Preparing a statement of
   partners’ equity.




                           18 - 18
         Learning Unit 18-2

 Partnership statement of owner’s equity
  is much like those of a proprietorship.
 The statement of owner’s equity shows
  additional investments by partner.
 It also shows drawings by partner.




                                            18 - 19
    Learning Objective 4


Journalizing entries to record
  admitting a new partner,
withdrawal of a partner, and
    bonuses to partners.


                                 18 - 20
         Learning Unit 18-3

           Buying an equity interest
            from an original partner:
 Cash is exchanged outside of the business
  and doesn’t affect partnership assets.
 The capital balance is transferred to the
  new partner.



                                              18 - 21
           Learning Unit 18-3

Assume that B. Burr sells his interest to Mr. Mix.

       November 1, 200x
       B. Burr, Capital 10,000
          Mix, Capital         10,000




                                                 18 - 22
         Learning Unit 18-3

     Investing in an existing partnership:
 Cash is paid to the partnership.
 Bonus is to the old partners when more is
  paid than the interest acquired.
 Bonus is to the new partner when less is
  paid than the interest acquired.
 New partner’s capital account is set up.


                                              18 - 23
          Learning Unit 18-3

          Withdrawal of a partner:
 Assets are adjusted to fair market value.
 Any gain or loss in the revaluation is shared
  according to the partners’ profit and loss
  ratio.
 A partner may withdraw according to an
  agreement that results in the partner leaving
  with more or less than book value.
                                                  18 - 24
    Learning Objective 5


Journalizing entries involved
in the liquidation process and
    preparing a statement
         of liquidation.


                                 18 - 25
         Learning Unit 18-4

The following steps complete liquidation:
 Assets are sold for cash.
 Any loss or gain is divided among the
  partners.
 Creditors are paid off.
 Any remaining cash is distributed
  to the partners.

                                            18 - 26
End of Chapter 18




                    18 - 27

				
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