Chapter 12 Video Lectures
Proprietorship
Business entity: Yes; Legal entity: No; Limited liability: No; Business taxed: No; One owner allowed: Yes
LLC (Limited Liability Company)
Business entity: Yes; Legal entity: Yes; Limited liability: Yes; Business taxed: No; One owner allowed: Yes
Corporation
Business entity: Yes; Legal entity: Yes; Limited liability: Yes; Business taxed: Yes; One owner allowed: Yes
Statement of liquidation
Can be prepared to summarize the impact of the liquidation on the partnership's accounts. We see that each account ends up with a zero balance.
$8,000 by Shahi and $12,000 by Vaughn
D. Shahi and K. Vaughn organize a partnership. Their partnership agreement states that Shahi will receive 40% of the partnership income or loss and Vaughn will receive the remaining 60%. On January 2, the two partners agree to accept Paul Williams as a partner with a 40% interest if Williams invests $80,000 cash. At the time of Williams' admission, the partnership`s accounting records show that Shahi has recorded equity of $80,000 and Vaughn has recorded equity of $90,000. The old partners will contribute to the bonus paid to Williams as follows:
To record the investment of a new partner
Dr. Cash, Dr. Boarding facilities, Cr. Notes Payable, and Cr. XX, Capital
To record the investment of initial partner
Dr. Cash, and Cr. XX, Capital
Dividing Income or Loss and Stated Ratio Basis - 3
In the absence of an agreement, the law says that partners share income or loss of a partnership equally. If partners agree on how to share income but say nothing about losses, they share losses the same way they share income. Three common methods to divide income or loss use: (1) A stated ratio basis, (2) The ratio of capital balances, or (3) Salary and interest allowances and any remainder according to a fixed ratio.
Dr. Cash 110,000, Cr. Land 100,000, and Cr. Gain from Liquidation 10,000
J. Morgan and M. Halsted are partners who share income and loss in a 3:1 ratio. After several unprofitable periods, the two partners decided to liquidate their partnership. The current period's income or loss is closed to the partners' capital accounts according to the sharing agreement. Immediately before liquidation, the partnership balance sheet shows: land, $100,000; accounts payable, $80,000; J. Morgan, Capital, $15,000; and M. Halsted, Capital, $5,000. On January 15, the land was sold for $110,000 cash. On January 16, the partnership settled its liabilities. On January 31, the remaining cash was distributed to the partners. Prepare the January 15 journal entry for the partnership.
Dr. Accounts Payable 80,000 and Cr. Cash 80,000
J. Morgan and M. Halsted are partners who share income and loss in a 3:1 ratio. After several unprofitable periods, the two partners decided to liquidate their partnership. The current period's income or loss is closed to the partners' capital accounts according to the sharing agreement. Immediately before liquidation, the partnership balance sheet shows: land, $100,000; accounts payable, $80,000; J. Morgan, Capital, $15,000; and M. Halsted, Capital, $5,000. On January 15, the land was sold for $110,000 cash. On January 16, the partnership settled its liabilities. On January 31, the remaining cash was distributed to the partners. Prepare the January 16 journal entry for the partnership to record the settlement of the liabilities.
Procedural Objective P3: Account for the admission and withdrawal of partners
When a new partner buys a partnership interest directly from one or more existing partners, the amount of cash paid from one partner to another does not affect the partnership total recorded equity. When a new partner purchases equity by investing additional assets in the partnership, the new partner's investment can yield a bonus either to existing partners or to the new partner. The entry to record a withdrawal can involve payment from either (1) the existing partners' personal assets or (2) partnership assets. The latter can yield a bonus to either the withdrawing or remaining partners.
Partnership
Business entity: Yes; Legal entity: No; Limited liability: No; Business taxed: No; One owner allowed: No
S Corporation
Business entity: Yes; Legal entity: Yes; Limited liability: Yes; Business taxed: No; One owner allowed: Yes
Forms of Business - 3
Certain corporations with 100 or fewer stockholders can elect to be treated as a partnership for income tax purposes. These corporations are called Sub-Chapter S or simply S corporations. This distinguishes them from other corporations, called C corporations. S corporations provide stockholders the same limited liability feature that C corporations do. The advantage of an S corporation is that it does not 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.
$12,000
Eric Christie and Johnnie Pitt organize a partnership. Their partnership agreement states that Christie will receive two-thirds of the partnership income or loss and Pitt will receive the remaining one-third. On January 2, the two partners agree to accept Peter Morgan as a partner with a 10% interest if Morgan invests $50,000 cash. At the time of Morgan's admission, the partnership`s accounting records show that Christie has recorded equity of $210,000 and Pitt has recorded equity of $60,000. The bonus that will be allocated to Christie as a result of this transaction (rounded to the nearest dollar) is:
Dr. Cash 20,000 and Cr. M. Alice, Capital 20,000
J. Arthur has a capital balance of $80,000 and E. Joseph has a capital balance of $100,000 in their partnership as of June 30. On July 1, the two partners agree to accept M. Alice as a partner in exchange for an investment of $20,000. Prepare the July 1 journal entry for the partnership.
Dr. J. Marie, Capital 53,000 and Cr. R. Dennis, Capital 53,000
J. Marie has a capital balance of $106,000 and M. Albert has a capital balance of $94,000 in their partnership as of September 30. On October 1, Marie sells one-half of her partnership interest to R. Dennis for $60,000 cash. Albert agrees to accept Dennis as a new partner. Prepare the October 1 journal entry for the partnership.
R. Patel: $12,000; D. Arno: $23,000
R. Patel, D. Arno, and S. Adams have operated their partnership for several years, sharing income and loss equally. The partners decide to liquidate. Immediately prior to the final distribution of cash, the account balances are: Cash, $21,000; R. Patel, Capital, $12,000; D. Arno, Capital, $23,000; and S. Adams, Capital, $(14,000). Refer to the background information shown. Assume that Adams will pay any capital deficiency owed to the partnership. In the final distribution of cash, Patel and Arno will each receive:
Dr. Cash 46,000, Cr. Land 40,000, and Cr. Gain from Liquidation 6,000
Sold noncash assets at a gain
Forms of Business - 1
Some individuals want to invest in a partnership, but are unwilling to accept the risk of unlimited liability. Their needs can be met with a limited partnership. 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. Limited partners have no active role except as specified in the partnership agreement.
Ratio of Capital Balances
The capital balances method of allocating partnership income or loss assigns an amount based on the ratio of each partner's relative capital balance. TAKE each partners' initial investment divided by the total of each partners' investments to get the ratio for each partner. THEN take the ratio times the total net income of the company. Has the same entry as the Stated Ratio Method, but different amounts.
Limited Life
The life of a partnership is limited. Death, bankruptcy, or any event taking away the ability of a partner to enter into or fulfill a contract ends a partnership. Any one of the partners can also terminate a partnership at will.
Company
The limited liability _______ combines certain characteristics of corporations and limited partnerships.
Stated Ratio Method
The stated ratio method of allocating partnership income or loss gives each partner a fraction of the total. Partners must agree on the fractional share each receives. TAKE NET INCOME TIMES THE AGREED UPON FRACTION
Dr. Gain from liquidation 6,000, Cr. K. Zayn, Capital 2,000, Cr. H. Perez, Capital, and Cr. T. Rasheed, Capital 2,000
To allocate liquidation gain to partners (6,000 gain between 3 partners)
Dr. K. Zayn, Capital 72,000, Dr. H. Perez, Capital 68,000, Dr. T. Rasheed, Capital 64,000, and Cr. Cash 204,000
To distribute remaining cash to partners (204,000)
Dr. K. Zayn, Capital 19,000, Dr. H. Perez, Capital 8,000, and Cr. Cash 27,000
To distribute remaining cash to partners (27,000)
Dr. K. Zayn, Capital 17,500, Dr. H. Perez, Capital 6,500, and Cr. Cash 24,000
To distribute remaining cash to partners - (Zayn Capital bal. 17,500 and Perez Capital bal. 6,500)
Dr. Accounts Payable 20,000 and Cr. Cash 20,000
To pay claims of creditors (20,000)
Dr. Cash and Cr. XX, Capital (New Partner)
To record admission of new partner by investment
Dr. H. Perez, Capital 38,000, Cr. Cash 34,000, Cr. K. Zayn, Capital 2,000, and Cr. T. Rasheed, Capital 2,000
To record withdrawal of Perez and bonus to remaining partners - (Share income equally, Perez capital equals 38,000; Perez withdraws 34,000, so bonus of 4,000 to other partners because withdrew less than actual capital)
Dr. H. Perez, Capital 38,000 and Cr. Cash 38,000
To record withdrawal of Perez from partnership with no bonus - (Perez capital balance of 38,000)
Procedural Objective P4: Prepare entries for partnership liquidation
When a partnership is liquidated, losses and gains from selling partnership assets are allocated to the partners according to their income-and-loss-sharing ratio. If a partner's capital account has a deficiency that the partner cannot pay, the other partners share the deficit according to their relative income-and-loss-sharing ratio.
Unlimited Liability
Legal relationship among general partners that makes each of them responsible for partnership debts if the other partners are unable to pay their shares.
Mutual Agency
Legal relationship among partners whereby each partner is an agent of the partnership and is able to bind the partnership to contracts within the scope of the partnership's business.
Investment in Capital divided by total ending capital balances of partners'
Percent of equity in the assets of the business
R. Patel: $5,000; Dr. Arno: $16,000
R. Patel, D. Arno, and S. Adams have operated their partnership for several years, sharing income and loss equally. The partners decide to liquidate. Immediately prior to the final distribution of cash, the account balances are: Cash, $21,000; R. Patel, Capital, $12,000; D. Arno, Capital, $23,000; and S. Adams, Capital, $(14,000). Refer to the background information shown. Assume that Adams cannot pay any capital deficiency owed to the partnership. In the final distribution of cash, Patel and Arno will each receive:
Dr. Withdrawing partner, Capital and Cr. New partner, Capital
The entry when the withdrawing partner sells his or her interest to another person who pays for it in cash or other assets
Limited
The life of a partnership is _________.
Allocation on Services, Capital, and Stated Ratio Method
The services, capital, and stated ratio method of allocating partnership income or loss recognizes that service and capital contributions of partners often are unequal. Salary allowances can make up for differences in service contributions. Interest allowances can make up for unequal capital contributions. And, the allocation of income and loss can include both salary and interest allowances.
Dr. Income Summary, Cr. XX, Capital (P1), and Cr. XX, Capital (P2)
To allocate income and close Income Summary
Dr. K. Zayn, Capital 1,500, Dr. H. Perez, Capital 1,500, and Cr. T. Rasheed, Capital 3,000
To transfer Rasheed deficiency to Zayn and Perez
Characteristics of Partnerships
Voluntary Association, Partnership Agreements, Limited Life, Taxation, Mutual Agency, Unlimited Liability, and Co-Ownership of Property
Mutual agency
__________ exposes partners to the risk of unwise actions by any one partner.
Partnership
A __________ is a voluntary association between partners.
LLP (Limited Liability Partnership)
Business entity: Yes; Legal entity: No; Limited liability: Limited; Business taxed: No; One owner allowed: No
General
In a limited partnership, at least one partner must be a __________ partner, who assumes management duties and unlimited liability for the debts of the partnership.
Withdrawal of a Partner
(1) First, the withdrawing partner can sell his or her interest to another person who pays for it in cash or other assets. One need only debit the withdrawing partner's capital account and credit the new partner's capital account. (2) Second, cash or other assets of the partnership can be distributed to the withdrawing partner in settlement of his or her interest. Accounting for a partner's withdrawal in this manner depends on whether a bonus is paid. We will examine this second case under various conditions.
A decrease to B. Brighton's capital account of $6,000
A. Amsterdam, B. Brighton, and C. Custer operated a partnership and had shared income and loss equally. At the time of Amsterdam's death, the partnership records show the following capital balances: A. Amsterdam, $83,000; B. Brighton, $70,000; and C. Custer, $90,000. Amsterdam's estate was considering a sale of Amsterdam's interest in the partnership to an outsider. As a result, Brighton and Custer offered a settlement of $ $95,000 for Amsterdam's partner's equity. The estate accepted the settlement. This settlement resulted in:
Partnership
An unincorporated association of two or more people to pursue a business for profit as co-owners. Partnerships are especially common in small retail and service businesses. Many professional practitioners, including physicians, lawyers, and accountants, organize their practices as partnerships.
Dr. Income Summary 90,000; Cr. E. Duffy, Capital 72,000; and Cr. J. Gladwin, Capital 18,000
Assume that Eric Duffy and Johnnie Gladwin operate a partnership. The partnership agreement states that the income and loss will be shared based on the ratio of their beginning capital balances. At the beginning of the year, Duffy had a capital balance of $80,000 and Gladwin had a capital balance of $20,000. The partnership's income statement reported net income of $90,000 for the year ending December 31. Prepare the December 31 journal entry that would be required to close the Income Summary account and allocate the net income to the two partners.
Dr. Income Summary 90,000; Cr. E. Duffy, Capital 60,000; and Cr. J. Gladwin, Capital 30,000
Assume that Eric Duffy and Johnnie Gladwin operate a partnership. Their partnership agreement states that E. Duffy receives two-thirds of the partnership income or loss and J. Gladwin receives the remaining one-third. The partnership's income statement reported net income of $90,000 for the year ending December 31. Prepare the December 31 journal entry that would be required to close the Income Summary account and allocate the net income to the two partners.
$67,000 to Barry and $53,000 to Tanya
At the beginning of the year, Barry's capital was $100,000 and Tanya's was $60,000. Their partnership agreement provides: (1) annual salary allowances of $60,000 to Barry and $50,000 to Tanya, (2) annual interest allowances of 10% of a partner's beginning-year capital balance, and (3) Barry and Tanya equally share any remaining balance of income or loss. ASSUMING the partnership has net income of $120,000 the allocation should be...
Dr. Gain from Liquidation 10,000, Cr. J. Morgan, Capital 7,500, and Cr. M. Halsted, Capital 2,500
J. Morgan and M. Halsted are partners who share income and loss in a 3:1 ratio. After several unprofitable periods, the two partners decided to liquidate their partnership. The current period's income or loss is closed to the partners' capital accounts according to the sharing agreement. Immediately before liquidation, the partnership balance sheet shows: land, $100,000; accounts payable, $80,000; J. Morgan, Capital, $15,000; and M. Halsted, Capital, $5,000. On January 15, the land was sold for $110,000 cash. On January 16, the partnership settled its liabilities. On January 31, the remaining cash was distributed to the partners. Prepare the January 15 journal entry for the partnership to record the allocation of the gain or loss from liquidation to the partners.
Forms of Business - 2
Most states allow individuals to form a limited liability partnership (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. However, most states hold all partners personally liable for other partnership debts.
Partnership Agreements
Partnership agreements normally include details of the partners' names and contributions, rights and duties, sharing of income and losses, withdrawal arrangement, dispute procedures, admission and withdrawal of partners, and rights and duties in the event a partner dies.
Co-Ownership of Property
Partnership assets are owned jointly by all partners. Any investment by a partner becomes the joint property of all partners. Partners have a claim on partnership assets based on their capital account and the partnership contract.
Dr. D. Hopkins, Capital 210,000, Cr. Cash 200,000, Cr. M. Hammel, Capital 5,000, and Cr. P. Houghton, Capital 5,000
Partnership records show the following capital balances at the date of Hopkin's withdrawal: M. Hammel, $80,000; D. Hopkins, $210,000; and P. Houghton, $100,000. The three partners share income and loss equally. On December 31, after the death of Hopkins, the two remaining partners, Hammel and Houghton, and the estate of Hopkins agree that a payment of $200,000 will be made to settle the capital balance of Hopkins. Prepare the December 31 journal entry for the partnership.
Dr. D. Hopkins, Capital 210,000, Cr. Cash 200,000, Cr. M. Hammel, Capital 5,000, and Cr. P. Houghton, Capital 5,000
Partnership records show the following capital balances at the date of Hopkins' withdrawal: M. Hammel, $80,000; D. Hopkins, $210,000; and P. Houghton, $100,000. The three partners share income and loss equally. On December 31, Hopkins withdraws and agrees to take $200,000 cash in settlement of her capital balance. Prepare the December 31 journal entry for the partnership.
D. Hopkins, Capital 210,000 and Cr. Cash 210,000
Partnership records show the following capital balances at the date of Hopkins' withdrawal: M. Hammel, $80,000; D. Hopkins, $210,000; and P. Houghton, $100,000. The three partners share income and loss equally. On December 31, Hopkins withdraws and agrees to take $210,000 cash in settlement of her capital balance. Prepare the December 31 journal entry for the partnership.
Conceptual Objective C1: Identify characteristics of partnerships and similar organizations
Partnerships are voluntary associations, involve partnership agreements, have limited life, are not subject to income tax, include mutual agency, and have unlimited liability. Organizations that combine selected characteristics of partnerships and corporations include limited partnerships, limited liability partnerships, S corporations, and limited liability companies.
Statement of Partner Equity
Reports each partner's beginning capital balance, additional investments, the allocation of the net income or loss, withdrawals, and ending capital balance.
Unlimited Liability
Unlimited liability implies that each partner can be called on to pay a partnership's debts. When a partnership cannot pay its debts, creditors usually can apply their claims to partners' personal assets. If a partner does not have enough assets to meet his or her share of the partnership debt, the creditors might be able to apply their claims to the assets of the other partners.
Dr. XX, Capital (Current Partner) and Cr. XX, Capital (New Partner) - DON'T USE CASH AMOUNT, BUT CAPITAL BALANCE AMOUNT
To record admission of new partner by purchase
Dr. Cash, Dr. XX, Capital (Current partner) (Not Bonus x ½), Dr. XX, Capital (Other current partner) (Not Bonus x ½), and Cr. XX, Capital (New partner)
To record new partner's admission and bonus - if new partner's equity is more than investment
Dr. Cash 3,000 and Cr. T. Rasheed, Capital 3,000
To record payment of deficiency by Rasheed (3,000)
$66,000 to Barry and $54,000 to Tanya
At the beginning of the year, Barry's capital was $100,000 and Tanya's was $60,000. Their partnership agreement provides: (1) annual salary allowances of $60,000 to Barry and $50,000 to Tanya, (2) annual interest allowances of 10% of a partner's beginning-year capital balance, and (3) Barry receives two-thirds and Tanya one-third of partnership income and loss. ACCORDINGLY, the allocation of net income $120,000 is...
Capital Deficiency
A capital deficiency occurs when at least one partner has a debit balance in his or her capital account at the point of final cash distribution. A partner with a capital deficiency must, if possible, cover the deficit by paying cash into the partnership.
Forms of Business - 4
A limited liability company (LLC or LC) combines certain characteristics of corporations and limited partnerships. The owners (called members) are protected with the same limited liability feature as owners of corporations. While limited partners cannot participate in the management of a limited partnership, LLC members can assume a management role. A LLC usually has a limited life. For income tax purposes, a limited liability company is typically treated as a partnership.
Procedural Objective P1: Prepare entries for partnership formation
A partner's initial investment is recorded at the market value of the assets and liabilities contributed to the partnership.
Is not
A partnership _________ subject to taxes on it income.
Procedural Objective P2: Allocate and record income and loss among partners
A partnership agreement should specify how to allocate partnership income or loss among partners. Allocation can be based on a stated ratio, capital balances, or salary and interest allowances to compensate partners for differences in their service and capital contributions.
Voluntary Association
A partnership is a voluntary association between two or more people, called partners. Their agreement becomes a partnership contract. Although it should be in writing, the contract is binding even if it is oral.
Taxation
A partnership is not subject to taxes on its income. The income or loss of a partnership is allocated to the partners according to the partnership agreement and is included in determining the taxable income on each partner's tax return.
Limited liability partnership
A(n) ________ is designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner.
S corporations
A(n) ________ with 100 or fewer stockholders can elect to be treated as a partnership for income tax purposes.
Dr. J. Morgan, Capital 22,500, Dr. M. Halsted, Capital 7,500, and Cr. Cash 30,000
J. Morgan and M. Halsted are partners who share income and loss in a 3:1 ratio. After several unprofitable periods, the two partners decided to liquidate their partnership. The current period's income or loss is closed to the partners' capital accounts according to the sharing agreement. Immediately before liquidation, the partnership balance sheet shows: land, $100,000; accounts payable, $80,000; J. Morgan, Capital, $15,000; and M. Halsted, Capital, $5,000. On January 15, the land was sold for $110,000 cash. On January 16, the partnership settled its liabilities. On January 31, the remaining cash was distributed to the partners. Prepare the January 31 journal entry for the partnership to record the distribution of the remaining cash to the partners.
Mutual Agency
Mutual agency implies that each partner is a fully authorized agent of the partnership. As its agent, a partner can commit or bind the partnership to any contract within the scope of the partnership business. Mutual agency exposes partners to the risk of unwise actions by any one partner. Partners can agree to limit the power of any one or more of the partners to negotiate contracts for the partnership.
Dr. Cash 25,000; Cr. N/P 5,000; Cr. R. Selleck, Capital 10,000; and Cr. M. Monroe, Capital 10,000
On July 1, R. Selleck and M. Monroe formed a partnership to provide legal services to clients. Selleck's investment is $10,000. Monroe's net investment is also $10,000, but it is comprised of cash ($15,000) and a note payable reflecting a bank loan for the new business ($5,000). Record both investments in a single compound journal entry.
Dividing Income or Loss and Stated Ratio Basis - 2
Partners also can agree to allocate "interest allowances" based on the amount invested. Like salary allowances, these interest allowances are not expenses on the income statement. Partners can agree to any method of dividing income or loss.
Dividing Income or Loss and Stated Ratio Basis - 1
Partners are not employees of the partnership but are its owners. If partners devote their time and services to their partnership, they do so for profit, not for salary. This means there are no salaries to partners that are reported as "expenses" on the partnership income statement. However, when net income or loss of a partnership is allocated among the partners, the partners can agree to allocate "salary allowances" reflecting the relative value of services provided.
Dr. H. Perez, Capital 38,000, Dr. K. Zayn, Capital 1,000, Dr. T. Rasheed, Capital 1,000, and Cr. Cash 40,000
To record Perez's withdrawal from partnership with a bonus to Perez (Perez capital 38,000, Perez withdraws 40,000, bonus of 2,000 to Perez because withdrew more than capital earned)
Dr. Cash, Cr. XX, Capital (New partner), Cr. XX, Capital (Current partner) (Bonus x ½), and Cr. XX, Capital (Other current partner) (Bonus x ½)
To record admission of new partner and bonus - if new partner's equity is less than investment