Chapter 2 Accounting For Partnerships

All examples are from
textbook by Larsen
ACCT 501
Chapter 2
Accounting for Partnerships:
Organization and Operation
Partnerships: Organization and Operation

2
Objectives of the Chapter
To learn the accounting and
reporting for limited liability
partnerships (LLPs) including:
a. the organization,
b. the income-sharing plans,
c. the financial statements, and
d. the changes in ownership.
To learn the accounting for limited
partnerships

3
Partnerships
The Uniform Partnership Act defines a
partnership as: "an association of two
or more persons to carry on, as co-
owners, a business for profit".
Partnerships generally are associated
with the practice of law, medicine,
public accounting and other
professions, and also with small
business enterprises.

4
Partnerships (contd.)
General partnership: in which all
partners have unlimited personal liability
for debts of the partnership.
Limited liability partnerships (LLPs):
individual partners of LLPs are
personally responsible for their own
actions and for the actions of
employees under their supervision.

5
The LLPs as a whole, like a general
partnership, is responsible for the
actions of all partners and employees.
Since the LLPs are the prevalent form
of partnerships and the issues of
organization, income-sharing plans and
changes in ownership of LLPs are
similar to those of general partnerships,
LLPs are discussed in this chapter.

6
Organization of a Limited Liability
Partnership (LLP)
Basic Characteristics of the LLP:
1. Ease of Formation.
2. Limited Life.
3. Mutual Agency.
4. Co-Ownership of Partnership Assets
and Earnings.


7
Major Differences between an LLP
and a Corporation
Characteristics of a corporation:
1. Separated legal entity from its owners:
it can buy, sell and own properties.
2. Limited liability for stockholders.
3. Continuous existence.
4. Ease of transfer of ownership.
5. Ease of capital generation.

8
Major Differences between an LLP
and a Corporation (contd.)
6. Centralized authority and responsibility--
to the President, not to numerous
owners.
7. Professional management
8. Corporation taxes (double taxation).
9. Separation of ownership and
management: principal & agent conflicts.
10. Government regulations.


9
Taxation of LLP
An LLP pays no income tax.
LLP is only required to file an annual
information return showing its revenue
and expenses, the amount of its net
income and the division of the net
income among the partners.

10
Taxation of LLP
The partners of LLP report their shares of
the ordinary net income from the
partnership and dividends and charitable
contributions in their individual income
tax returns, regardless of whether they
received more of less than this amount of
cash from the LLP.

11
Is the LLP a Separate Entity ?
Legal status: a partnership is an
"association of persons" and is not a
separate entity while a corporation is a
separate entity from its owners.
Economic substance: in terms of
managerial policy and business
objectives, LLPs are as much business
and accounting entities as are
corporations.

12
Is the LLP a Separate Entity ?
(contd).
LLPs typically are guided by long-
range plans not likely to be affected
by the admission or departure of a
single partner.
The accounting policies of LLPs
should reflect the fact that the
partnership is an accounting entity
apart from its owners.

13
The Partnership Contract
A good business practice requires
the partnership contract in writing.
The followings are a few important
points to be covered in a written
contract for a LLP:

14
The Partnership Contract (contd.)
1. The formation date and the planned
duration of the partnership; the names
of the partners, and the name and
business activities of the partnership.
2. The assets to be invested by each
partner, the procedure for valuing
noncash investments, and the
penalties for a partner's failure to
invest and maintain the agreed
amount of capital.

15
3. The authority, the rights and the duties
of each partner.
4. The accounting period to be used, the
nature of accounting records, financial
statements and audits by independent
public accountants.
5. The net income (loss) sharing plans.

16
6. The drawings allowed to each partner.
7. Insurance on the lives of partners
8. Provision for arbitration of disputes.
9. Provision for liquidation of the
partnership at the end of the term
specified in the contract or at the
death or retirement of a partner.

17
Ledger Accounts for Partners
The following three types of accounts
are used in LLPs for each partner:
1. Capital accounts.
2. Drawing accounts.
3. Accounts for loans to and from
partners.


18
Ledger Accounts for Partners (contd.)
The original investment from partner is
recorded as:
Assets (based on current fair value) $$$
Liabilities $$$
Capital-Partner A $$$
Drawings from Partners are recorded as:
Drawing Partner A $$$
Cash $$$


19
At the end of each accounting period,
the income summary ledger account is
transferred to the capital accounts in
accordance with income sharing plan
specified in the contract.
Also, the debit balances in the drawing
accounts are closed to the partner's
capital account.

20
Loans Receivable from Partners: this
account is debited when a partner
receives cash from the LLP with the
intention to repay this amount.
Loans Payable to Partners: this
account is credited when a partner
makes a cash payment to the LLP that
is considered a loan rather than an
investment.

21
If a substantial unsecured loan has
been made to a partner and repayment
appears doubtful, it is appropriate to
offset the receivable against the
partner's capital account.


22
Valuation of Investments by Partners

Gains or losses from disposal of
noncash assets invested by the
partners is measured as:
The disposal price the current fair
value of the assets when invested
adjusted for any depreciation or amortization to the date
of disposal.
These gains (losses) are divided based
on the income sharing plan of the LLP.

23
Income-Sharing Plans for LLP
Partners can agree on any type of income
sharing plan regardless of the amount of
their respective capital investment.
The Uniform Partnership Act states that if
partners fail to specify a plan for sharing
net income/loss, it is assumed that they
intend to share equally.

24
(contd.)
The following are a few possible plans of
income-sharing:
1. Equally.
2. In the ratio of partners' capital account
balance on a specific date or in the ratio
of average capital account balance in
the year.
3. Allowing interest on partner's capital
account balances and dividing the
remaining net income/loss in a specified
ratio.

25
(contd.)
4. Allowing salaries to partners and dividing
the remaining net income/loss in a
specified ratio.
5. Bonus to managing partner based on
income.
6. Allowing salaries to partners, allowing
interest on capital account balances,
and dividing the remaining net
income/loss in a specified ratio.


26
Income-Sharing Plans for LLP-
Examples
Alb & Bay LLP had a net income of
$300,000 for the year ended 12/31/99, the
first year of operation.
The partnership contract provides that
each partner may withdraw $5,000 cash on
the last day of each month. Both partners
did so during 1999.
All other withdrawals, investments and net
income/loss are entered directly in the
capital account.

27
Examples (contd.)
Alb invested $4,000,000 on 1/1/99 and an
additional $100,000 on 4/1. Bay invested
$800,000 on 1/1/ and withdrew $50,000 on
7/1.
These transactions and events are
summarized in the following ledger
accounts:

28
Examples (contd.)
Alb, Capital Bay, Capital
400,0001/1 7/1..50,000 800,000..1/1
100,0004/1

Alb, Drawing Bay, Drawing
Jan.-Dec.60,000 Jan.-Dec. 60,000
Income Summary
300,00012/31


29
Examples (contd.)
If the entire net income is shared equally, the
following entry is recorded:
Income Summary 300,000
Alb, Capital 150,000
Bay, Capital 150,000
At the end of 1999, the drawing accounts are to be
closed to Income Summary as follows:
Alb, Capital 60,000
Bay, Capital 60,000
Alb,Drawing 60,000
Bay,Drawing 60,000


30
Examples (contd.)
The entire income/loss can be shared at
any specified ratio specified in the contract.
LLP can apply one sharing ration to net
income but another ratio to net loss.
LLP can apply one sharing ratio to net
income equal or less than a specific amount
but another ratio to net income greater than
that amount.

31
Examples (contd.)
The entire income/loss of LLP can also be
shared by the ratio of partners' capital
account balances such as:
by the original capital investments,
by the capital account balance at the,
beginning of each year,
by the balances at the end of each year
(before the distribution of net income/loss), and
by the average balances during the year.

32
Examples (contd.)
The assumption of the sharing based on
the capital ratio is that the capital
investment is the sole determinant of the
income of LLP.
Thus, another common practice in
income sharing of LLP is to divide only a
portion of net income in the capital ratio
and to divide the remainder equally or in
some other specified ratio.

33
Interest on Partner's Capital account balances
with Remaining Divided in Specified Ratio
A method to carry out the above sharing
scheme is to allow interest on partners'
capital balance at 15%, for example, and
dividing the remainder at a specified ratio.
This method is the same as dividing only a
portion of net income in the ratio of
partners' capital balances.
If this income sharing scheme is used, LLP
needs to specify the interest rate and the
capital account balances to be used.

34
Example: Assume that the partnership
contract allows interest on partners'
average capital account balances at 15%
with remainder to be divided equally.
The net income of $300,000 for 1999 is
divided as follows:
Note: the average capital balances for Alb
and Bay are $475,000 and $775,000,
respectively.

35
(contd.)
Alb Bay Combined
Interest on average
capital account balances:
Alb: $475,000X0.15 $71,250 $71,250
Bay: $775,000X0.15 $116,250 116,250
Subtotal $187,500
Remainder ($300,000-
$187,500) divided
equally
56,250 56,250 112,500
Total $127,500 $172,500 $300,000

36
with Remaining Divided in Specified Ratio (condt.)
The provision of allowing interest on
capital balance should be carried out
even in the case of net loss unless
otherwise indicated in the contract.
Example (with net loss): assume that
$10,000 net loss incurred for the year of
1999, the following table presents the
division of the net loss for the year of
1999:

37
Alb Bay Combined
Interest on average capital
account balances:
Alb: $475,000X0.15 $71,250 $71,250
Bay: $775,000X0.15 $116,250 116,250
Subtotal $187,500
Resulting deficiency
($10,000+$187,500)
divided equally
(98,750) (98,750) 197,500
Total $(27,500) $17,500 $(10,000)

38
The journal entry to close the Income
Summary ledger account on December 31,
1999, is shown below:

Alb, Capital 27,500
Bay, Capital 17,500

To record division of net loss for 1999.

39
The rational underlies the above
allocation:
The above income sharing scheme
assumes that capital is NOT the only
factor to cause the net loss;
therefore, the net loss should not be
allocated solely on the capital ratio.

40
Salary Allowance with Remaining Net
Income Divided in Specific ratio
One partner may contribute more
services to the LLP than the other.
If the income-sharing is based solely on
the amount of services provided by each
partner, the following problems arise:
1) the success of a LLP is not
determined solely by the services
provided by partners.
2) in the case of net loss, the partner
renders more services will absorb a
larger portion of the loss.

41
Income Divided in Specific ratio (contd.)
One solution to avoid these problems as
well as recognize the unequal services of
partners is to provide salaries to partners
based on their services to the LLP.
The remaining net income is to be
shared equally or in a specified ratio.
Example: assume the contract provides
for an annual salary of $100,000 to Alb
and $60,000 to Bay with remaining net
income divided equally.

42
Alb Bay Combined
Salaries $100,000 $60,000 $160,000
Net income ($300,000-
$160,000) divided equally
70,000 70,000 140,000
Totals
$170,000 $130,000 $300,000
The salaries are paid monthly during the
year. The net income of $140,000
($300,000-100,000-60,000) for 1999 is
divided as follows:


43
Monthly Journal Entries:
Salaries Expense 13,333
Capital Alb 8,333
Capital-Bay 5,000
Alb, Drawing 8,333
Bay, Drawing 5,000
Cash 13,333
Alb, Capital 70,000
Bay, Capital 70,000


44
Bonus to Managing Partner Based
on Income
A partnership contract may provide
bonus to the managing partners equal
to a specified % of income.
The contract should state whether the
% is based on the income prior to the
bonus or after the bonus.
Example (% is based on the income
after the bonus):

45
Bonus to Managing Partner Based
on Income (contd.)
Assume that the net income is
$300,000 and the contract provided for
a bonus of 25% of income after the
bonus to Partner Alb. The remainder of
net income is to be divided equally.
The bonus to Alb is computed as
follows:
0.25 x ($300,000-B) = B =>
$75,000 = 1.25 x B => B = $60,000
Note: The concept of a bonus is not
applicable to a net loss.

46
Salaries to Partners with Interest on
Capital Accounts
Many LLPs divide income or loss by
allowing salaries to partners and also
interest on their capital account
balances.
Any resultant net income or loss is
divided equally or in some other ratio.
Example: assume the following:
1. Annual salaries of $100,000 to Alb and
$60,000 to Bay, recognized as
operating expense.

47
Capital Accounts (contd.)
2. Interest on average capital account
balances, as computed on page 39
($71,250 for Alb and $116,250 for Bay).
3. The remaining net income or loss
divided equally.
4. Assuming income of $300,000 fir 1999
before annual salaries, the $140,000
net income is divided as follows:

48
Capital Accounts Example (contd.)
Alb Bay Combined
Interest on average capital
account balances:
Alb: $475,000X0.15 $71,250 $71,250
Bay: $775,000X0.15 $116,250 116,250
Subtotal $187,500
Resulting deficiency
($187,500-$140,000)
divided equally
(23,750) (23,750) (47,500)
Total $47,500 $92,500 $140,000

49
Financial Statements of an LLP
Income Statement
Net sales $3,000,000
Cost of goods on sold 1,800,000
Gross margin on sales $1,200,000
Partners salaries expense $160,000
Other operating expenses 900,000 1,060,000
Net income $ 140,000
Division of net income:
Partner Alb $ 47,500
Partner Bay 92,500
Total $140,000

50
Income Statement (contd.)
Notes to the I/S:
1. Explanations of the division of net
income may be included in the
partnership's income statement or in
a note to the financial statements.
2. A partnership in not subject to
income taxes.

51
Income Statement (contd.)
Notes to the I/S (contd.)
3. The partners are taxed for their
shares of partnership income,
including their salaries (this
information can be disclosed).


52
Statement of Partner's Capital
A statement of partner's capital provides
a complete explanation of the changes
in the partners' capital accounts each
year.
The following statement o partners'
capital for Alb& Bay LLP is based on the
capital accounts presented on p30 and
includes the income division of net
income illustrated in the foregoing
income statement:

53
Statement of Partner's Capital
Partner
Alb
Partner
Bay
Combined
Partners original
investments, beginning of
year
$400,000 $800,000 $1,200,000
Additional investment
(withdrawal) of capital
100,000 (50,000) $71,250
Balances before salaries,
net income, and drawing
$500,000 $750,000 $1,250,000
Add: Salaries 100,000 60,000 160,000
Net income 47,500 92,500 140,000
Subtotals $647,500 $902,500 $140,000
Less: Drawings 100,000 60,000 160,000
Partners, capital, end of
year
$547,500 $842,500 $1,390,000

54
Statement of Partner's Capital (contd.)
Note:
Partners' capital at end of year is
reported as owners' equity in the
12/31/1999, balance sheet of the
partnership as illustrated on page
57.

55
Condensed Balance Sheet Statement
Cash $50,000 Trade accounts
payable
$240,000
Trade accounts
receivable
40,000 Long-term debt 370,000
Inventories 360,000 Total Liabilities $610,000
Plant assets
(net)
1,550,000 Partners capital:
Partner Alb $547,500
Partner Bay 842,500 1,390,000
Total assets $2,000,000 Total
liabilities &
partners
capital
$2,000,000
Assets Liabilities & Partners Capital

56
Statement of Cash Flows
A statement of cash flows is prepared
for a partnership as it is for a
corporation.
A statement of cash flows for Alb & Bay
LLP under the indirect method is as
follows:

57
Statement of Cash Flows (contd.)
Cash flows from operating activities:
Net income $140,000
Adjustments to reconcile net income to net
cash provided by operating actives:
Partners salaries expense $160,000
Depreciation expense 20,000
Increase in trade accounts receivable (40,000)
Increase in inventories (360,000)
Increase in trade accounts payable 240,000 20,000
Net cash provided by operating
activities
$160,000
Cash flows from investing activities:
Acquisition of plant assets $(1,200,000)

58
Statement of Cash Flows (contd.)
Cash flows from financing activities:
Partners investments $1,300,000
Partners withdrawal (50,000)
Partners drawings (160,000)
Net cash provided by financing
activities
1,090,000
Net increase in cash (cash at end of year) $ 50,000

Exhibit I Noncash investing and financing activity:
Capital lease obligation incurred for
plant assets
$ 370,000

59
Correction of Partnership Net Income of Prior
Period Changes in Income Sharing Plan
When prior period adjustments occurred,
the change in the prior period
income/loss should be divided based on
the income sharing plan of the year in
which the error occurred, not the
current years'.
This principle applies to the appreciation
in assets when income sharing plan
changes.

60
Changes in Ownership of LLPs
From a legal point of view, a LLP is
dissolved when:
1. Admit a new partner,
2. the retirement or death of a partner,
3. the bankruptcy of the firm or of any
partner,
4. the expiration of a time period stated in
the contract, or
5. the mutual agreement of the partners to
end their association.

61
Changes in Ownership of LLPs (contd.)
Thus, the term dissolution is used
for events ranging from a minor
change of ownership not affecting
operations of the LLP to a decision
by the partners to terminate the
LLP.

62
Changes in Ownership of LLPs (contd.)
Accountants are more concerned
with the economic substance of an
event than with the legal form of an
event.
The change in partnership should
be recorded after evaluate all the
circumstances of the individual
case.

63
Admission of a New Partner General
Principles to Follow
When a new partner is admitted to a
LLP, the existing assets should be
revalued and the excess should
increase the capital of the existing
partners.
This excess can be allocated based
on the income sharing plan.

64
Admission of a New Partner General
Principles to Follow (contd.)
When the investment amount of a new
partner is greater than the capital
credited to the new partner, the excess
is bonus to the existing partners.
Journal entry:
Asset 70,000
Capital, new 60,000
Capital, existing 10,000
(also see example on p72)

65
Admission of a New Partner-General
When the investment amount of a new
partner is less than the capital credited
to the new partner, the excess is bonus
to the new partner or goodwill to the
partnership
Journal entry (the excess is bonus to the
new partner) (also see p77 for example) :
Assets (invested by the new partner) 70,000
Capital, existing 10,000
Capital, new 80,000

66
Admission of a New Partner-General
Journal entry (the excess is goodwill to
the partnership)(also see p80 and p2-2 for
examples):
Assets (invested by the new partner) 90,000
Goodwill 10,000
Liabilities 20,000
Capital, new 80,000
Note: This can only be done when the new
partner is investing his/her proprietorship.

67
Admission of a New Partner-Examples
Acquisition of an Interest by Payment
to One of More partners:
Assume that Lane and Mull, partners of
Lane & Mull LLP share net income
equally and that each has a capital
balance of $60,000.
Nash (with the consent of Mull) acquires
half of Lane's interest in the partnership
by a cash payment to Lane.

68
Admission of a New Partner-
Examples(contd.)
The J.E. to record this change in ownership
follows:
Lane, Capital ($60,000 X 1/2) 30,000

Nash, Capital 30,000

Note: the cash paid by Nash to Lane is
irrelevant for this journal entry.


69
Examples(contd.)
Investment in Partnership by New Partner:
Assume that Wolk and Yary, partners of Wolk
&Yary LLP, share net income/loss equally and
each has a capital balance of $60,000.
Assume also that the carrying amounts of
partnership assets are equal to current fair
values.
Wolk and Yary agree to admit Zell to the
partnership by investment of Zell's land.


70
Examples(contd.)
The fair value of Zell's land is $80,000.
Net income/loss will be shared equally by the
three partners. The admission of Zell is
recorded by the partnership as follows:

Land 80,000
Zell, Capital 80,000
To record admission of Zell to partnership.

71
Examples(contd.)
Bonus to Existing Partners:
Assume that in Cain & Duke LLP, the
two partners share net income/loss
equally and have capital account
balances of $45,000 each.
The carrying amounts of the partnership
net assets approximate current fair
values.

72
Examples(contd.)
Bonus to Existing Partners (contd.):
The partnership agree admit Eck to a one-
third interest in capital and one-third share in
net income/loss for a cash investment of
$60,000.
Thus, the net assets of the new firm amount
to $150,000 ($45,000+$45,00+$60,000).
The following entry should be recorded for
the admission of the new partner:

73
Admission of a New Partner-with
Bonus to Existing Partners
Cash 60,000
Cain, Capital ($10,000 X 1/2) 5,000
Duke, Capital ($10,000 X 1/2) 5,000
Eck, Capital ($150,000 X 1/3) 50,000

To record investment by Eck for a one-third interest in
capital, with bonus of $10,000 divided equally between
Cain and Duke.

Note: the capital credit to the new partner is
less than the investment amount. The excess
is credited to the bonus of existing partners.

74
goodwill to existing partners
The one-third share interest in capital (net
assets) to the new partner can also be
achieved by the following journal entry (not
recommended):
Cash 60,000
Goodwill ($120,000 - $90,000) 30,000
Cain, Capital ($30,000 X 1/2) 15,000
Duke, Capital ($10,000 X 1/2) 15,000
Eck, Capital 60,000

To record investment by Eck for a one-third interest in capital, with credit
offsetting goodwill of $30,000 divided equally between Cain and Duke.

75
Admission of a New Partner-Fairness of
Asset Valuation
Assume that the net assets of Cain&Duke
LLP carried at $90,000, were estimated to
have a current fair value f $120,000 at the
time of admission of Eck as a partner.
The LLP required Eck to invest $60,000 for a
one-third interest in partnership net assets.

76
Admission of a New Partner-Fairness of
Asset Valuation
An alternative recording of the above event
is:

Assets 30,000
Cash 60,000
Cain, Capital 15,000
Duke, Capital 15,000
Eck, Capital 60,000

77
Bonus to New Partner
Excess capital recorded as bonus to New
Partner:
Assume Farr and Gold, partners of Farr &
Gold, LLP, share net income/loss equally
and have capital account balances of
$35,000 each.
The partnership offer Hart a one-third
interest in capital and one-third share of net
income/loss for an investment of $20,000.
1/3 *($35,000x2+20,000) = $30,000

78
Excess capital for Hart => $30,000-20,000
=10,000
This event should be journalized as follows
when the excess of capital to the new
partner is recorded as bonus to the new
partner:

Cash 20,000
Farr, Capital ($10,000 X 1/2) 5,000
Gold, Capital ($10,000 X 1/2) 5,000
Hart, Capital 30,000
To record admission of Hart, with bonus of $10,000 from Farr and Gold.

79
The above treatment assumes that the net
assets of the LLP were valued properly prior
to the admission of Hart.
If not, the net assets should be written down
(debit the capital accounts) to the fair value
prior to the above journal entry.

80
Goodwill to New Partner
Excess capital recorded as goodwill to New
Partner (see P2-2 for an example):
Assume that the new partner Hart is the
owner of a successful proprietorship that
Hart invests in the partnership rather than
making an investment in cash.
Using the same data as in the preceding
example, and the identifiable tangible and
intangible net assets of the proprietorship
owned by Hart are worth $20,000.

81
Goodwill to New Partner (contd.)
Due to Hart's superior earnings power, the
current fair value for the total net assets is
agreed to be $35,000.
Thus, the capital, Hart was credited for
$35,000.
The admission of Hart to the partnership is
recorded as shown below:

82
Goodwill to New Partner (contd.)
Identifiable Tangible and
Intangible Net Assets 20,000
Goodwill ($35,000 - $20,000) 15,000
Hart, Capital 35,000

To record admission of Hart; goodwill is attributable to
superior earnings of single proprietorship invested by Hart.


83
Retirement of a Partner- Computation
of the Settlement Price
At retirement of a partner, the assets of the
partnership should be revalued at the current
fair.
The gain or loss should be allocated to all
partners based on their income-sharing plan
(i.e., debit assets and credit capital accounts).
After the allocation, the capital balance of the
retiring partner is adjusted to the basis of
current fair values of partnership's net assets.

84
Retirement of a Partner- Bonus to
Retiring Partner
The partners may agree to settle by payment
of this amount (the adjusted capital balance of
the retiring partner), or on a different amount.
If the payment is greater than the adjusted
capital balance of the retiring partner, the
excess payment is considered as a bonus to
the retiring partner (see p88 for an example).
General Journal entry: Capital retiring $$$
Capital continuing $$$
Cash $$$

85
Continuing Partners
If the payment is less than the adjusted
capital balance of the retiring partner, the
difference is considered as a bonus to the
continuing partners.
General Journal Entry:
Capital retiring $$$
Cash $$$
Capital, continuing $$$
Also see p91 and E2-17 for an example.

86
Retiring Partner (example)
Assume that partner Lund is to retire from
Jorb, Kent & Lund LLP. Each partner has a
capital balance of $60,000, and net income
and losses are shared equally.
The contract provides that a retiring partner
is to receive the balance of the retiring
partner capital account plus a share of any
internally generated goodwill.


87
At the time of Lund's retirement, goodwill in
the amount of $30,000 is computed.
The appropriate treatment is to record the
amount paid to Lund for goodwill as a
$10,000 bonus.
The journal entry is as follows:


88
Lund, Capital 60,000
Jorb, Capital ($10,000 X 1/2) 5,000
Kent, Capital ($10,000 X 1/2) 5,000
Cash 70,000
To record payment to retiring partner Lund, including a
bonus of $10,000.


89
This bonus method illustrated above is
appropriate whenever the settlement
exceeds the capital account balance of the
retiring partner.
The agreement for settlement may not use
the term goodwill.


90
Continuing Partner (example)
Assume that the three partners, Noll, Merz
and Park share net income/loss equally.
Each has a capital balance of $60,000.
Noll retires from the partnership and
receives $50,000.
The journal entry to record Noll's
retirement is as follows:

91
Continuing Partner (example)
Noll, Capital 60,000
Cash 50,000
Merz, Capital ($10,000 X 1/2) 5,000
Park, Capital ($10,000 X 1/2) 5,000

To record retirement of Partner Noll for an amount less than
carrying amount of Nolls equity, with a bonus to
continuing partners.

92
Limited Partnerships
The legal provisions governing limited
partnerships are provided by the Uniform
Limited Partnership Act.
The important features of a limited
partnership are the following:
1. There must be at least one general partner.
2. Limited partners have no obligation for
unpaid liabilities of the limited partnership;
only general partners have such liability.

93
Limited Partnerships (contd.)
3. Limited partners have no participation in
the management of the partnership.
4. Limited partners may invest only cash or
other assets in a limited partnership; they
may not provide services as their
investment.
5. The surname of a limited partner may not
appear in the name of the partnership.


94
6. The formation of a limited partnership
is evidenced by a certificate filed with
the county recorder of the principal
place of business of the limited
partnership.

95
Membership in a limited partnership is
offered to limited partners in units subject to
the Securities Act of 1933.
Thus, unless exempt by the provisions of that
Act, a limited partnership must file a
registration statement for the offered units
with the SEC and file reports with the SEC.

96
Accounting for Limited Partnerships
The accounting for limited partnerships
parallels that accounting for LLPs.
However, limited partners do not have
periodic drawings debited to Drawing ledger
account.
In Staff Accounting Bulletin 40, the SEC
requires the equity section of a limited
partnership balance sheet specify amounts
for each ownership class (i.e., the general
partner versus the limited partners).

97
Financial Statements for Limited
Partnerships
Assume that Wesley Randall formed Randall
Company, a limited partnership that was
exempt from the registration requirements of
the Securities Act of 1933 on 1/2/1999.
Wesley Randall, the general partner,
acquired 30 units at $1,000 a unit, and 30
limited partners acquired a total of 570 units
at $1,000.
The certificate for Randall Company provided

98
The certificate for Randall Company
provided that limited partners might
withdraw their net equity only on 12/31
of each year.
Randall was authorized to withdrew
$500 a month at his discretion, but he
had no drawings during 1999.

99
Randall Company had a net income of
$90,000 for 1999 and on 12/31/99, two
limited partners withdrew their entire
equity interest of 40 units.
The following condensed financial
statements incorporate the foregoing
assumptions and comply with the
provisions of Staff Accounting Bulletin
40:

100
Income Statement of Randall Company a
Limited Partnerships for the Year Ended
12/31/99
Revenue $400,000
Costs and expenses 310,000
Net income $ 90,000
Division of net income ($150* per unit
based on 600 weighted average
units outstanding):
To general partner (30 units) $4,500
To limited partners (570 units) 85,500
Total $90,000

*$90,000 / 600 units outstanding throughout 1999=$150.


101
Statement of Partners' Capital for Year
Ended 12/31/1999
Units Amount Units Amount Units Amount
Initial investments,
beginning of year
30 $30,000 570 $570,000 600 $600,000
Add: Net income 4,500 85,500 90,000
Subtotals 30 $34,500 570 $655,500 600 $690,000
Less: Redemption of
units
40 46,000 40 46,000
Partners capital,
end of year
30 $34,500 530 $609,500 560 $644,000
General Partner Limited Partners Combined

102
Balance Sheet, 12/31/99
Current assets $240,000 Current liabilities $100,000
Other assets 760,000 Long-term debt 256,000
Total Liabilities $356,000
Partners capital
($1,150* per unit
based on 560 units
outstanding):
General partner $34,500
Limited partners 609,500 644,000
Total
assets
$1,000,000 Total liabilities
& partners
capital
$1,000,000
Assets Liabilities & Partners Capital
*$644,000 / 560 = $1,150

Chapter 2 Accounting For Partnerships

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