Accounting principles 8th weygars kieso kimmel chapter 12

Chapter
12-1


CHAPTER 12

ACCOUNTING FOR
PARTNERSHIPS
Accounting Principles, Eighth Edition
Chapter
12-2


Study
Study Objectives
Objectives
1.

Identify the characteristics of the partnership
form of business organization.

2.

Explain the accounting entries for the formation of
a partnership.

3.

Identify the bases for dividing net income or net
loss.

4.

Describe the form and content of partnership
financial statements.

5.

Explain the effects of the entries to record the
liquidation of a partnership.

Chapter
12-3


Accounting
Accounting for
for Partnerships
Partnerships

Partnership
Partnership
Form
Formof
of
Organization
Organization
Characteristics
Organizations
with partnership
characteristics

Advantages /
disadvantages
Partnership
agreement
Chapter
12-4

Basic
Basic
Partnership
Partnership
Accounting
Accounting
Forming a
partnership
Dividing net
income / loss
Financial
statements

Liquidation
Liquidationof
ofaa
Partnership
Partnership
No capital
deficiency
Capital
deficiency

Partnership
Partnership Form
Form of
of Organization
Organization
A partnership is an association of two or more
persons to carry on as co-owners of a business
for profit.
Type of Business:
Small retail, service, or manufacturing companies.
Accountants, lawyers, and doctors.

Chapter
12-5

LO 1 Identify the characteristics of the partnership
form of business organization.


Partnership
Partnership Form
Form of
of Organization
Organization

Discussion Question
Q12-1 The characteristics of a partnership
include the following: (a) association of
individuals, (b) limited life, and (c) co-ownership

of property. Explain each of these terms.

See notes page for discussion

Chapter
12-6

LO 1 Identify the characteristics of the partnership
form of business organization.


Characteristics
Characteristics of
of Partnerships
Partnerships
Association of Individuals
Legal entity.
Accounting entity.
Net income not taxed as a separate entity.

Mutual Agency
Act of any partner is binding on all other partners,
so long as the act appears to be appropriate for
the partnership.
Chapter
12-7

LO 1 Identify the characteristics of the partnership
form of business organization.

Characteristics
Characteristics of
of Partnerships
Partnerships
Limited Life
Dissolution occurs whenever a partner withdraws
or a new partner is admitted.
Dissolution does not mean the business ends.

Unlimited Liability
Each partner is personally and individually liable
for all partnership liabilities.

Chapter
12-8

LO 1 Identify the characteristics of the partnership
form of business organization.


Characteristics
Characteristics of
of Partnerships
Partnerships
Co-ownership of Property
Each partner has a claim on total assets.
This claim does not attach to specific assets.
All net income or net loss is shared equally by the
partners, unless otherwise stated in the

partnership agreement.

Chapter
12-9

LO 1 Identify the characteristics of the partnership
form of business organization.


Characteristics
Characteristics of
of Partnerships
Partnerships

Question
All of the following are characteristics of
partnerships except:
a. co-ownership of property.
b. mutual agency.
c. limited life.
d. limited liability.

Chapter
12-10

LO 1 Identify the characteristics of the partnership
form of business organization.


Organizations

Organizations with
with Partnership
Partnership Characteristics
Characteristics
Special forms of business organizations are often
used to provide protection from unlimited liability.
Special partnership forms are:
1. Limited Partnerships,
2. Limited Liability Partnerships, and
3. Limited Liability Companies.

Chapter
12-11

LO 1 Identify the characteristics of the partnership
form of business organization.


Organizations
Organizations with
with
Partnership
Partnership Characteristics
Characteristics
Regular Partnership

Major Advantages
Simple and
inexpensive to create
and operate.

Chapter
12-12

Major Disadvantages
Owners (partners)
personally liable for
business debts.

LO 1 Identify the characteristics of the partnership
form of business organization.


Organizations
Organizations with
with
Partnership
Partnership Characteristics
Characteristics
Major Advantages

“Ltd.,” or “LP”

Limited partners have
limited personal liability
for business debts as long
as they do not participate
in management.
General partners can
raise cash without

involving outside investors
in management of
business.
Chapter
12-13

Major Disadvantages
General partners
personally liable for
business debts.
More expensive to create
than regular partnership.
Suitable for companies
that invest in real estate.

LO 1 Identify the characteristics of the partnership
form of business organization.


Organizations
Organizations with
with
Partnership
Partnership Characteristics
Characteristics
“LLP”

Major Advantages
Mostly of interest to
partners in old-line

professions such as law,
medicine, and accounting.
Owners (partners) are
not personally liable for
the malpractice of other
partners.

Major Disadvantages
Unlike a limited liability
company, partners remain
personally liable for many
types of obligations owed
to business creditors,
lenders, and landlords.
Often limited to a short
list of professions.

Chapter
12-14

LO 1 Identify the characteristics of the partnership
form of business organization.


Organizations
Organizations with
with
Partnership
Partnership Characteristics
Characteristics

“LLC”

Major Advantages
Owners have limited
personal liability for
business debts even if
they participate in
management.

Chapter
12-15

Major Disadvantages
More expensive to create
than regular partnership.

LO 1 Identify the characteristics of the partnership
form of business organization.


Partnership
Partnership Characteristics
Characteristics

Discussion Question
Q12-3 Brent Houghton and Dick Kreibach are
considering a business venture. They ask you to
explain the advantages and disadvantages of the
partnership form of organization.

See notes page for discussion

Chapter
12-16

LO 1 Identify the characteristics of the partnership
form of business organization.


Partnership
Partnership Characteristics
Characteristics

Question
Under which of the following business organization
forms do limited partners have little, if any, active
role in the management of the business?
a.

Limited liability partnership.

b. Limited partnership.
c.

Limited liability companies.

d. None of the above.

Chapter
12-17

LO 1 Identify the characteristics of the partnership
form of business organization.


Partnership
Partnership Agreement
Agreement
Should specify relationships among the partners:
1. Names and capital contributions of partners.
2. Rights and duties of partners.
3. Basis for sharing net income or net loss.
4. Provision for withdrawals of assets.
5. Procedures for submitting disputes to arbitration.
6. Procedures for the withdrawal or addition of a partner.
7. Rights and duties of surviving partners in the event of a
partner’s death.
Chapter
12-18

LO 1 Identify the characteristics of the partnership
form of business organization.


Forming
Forming aa Partnership
Partnership

Question
When a partner invests noncash assets in a

partnership, the assets should be recorded at their:
a. book value.
b. carrying value.
c. fair market value.
d. original cost.

Chapter
12-19

LO 2 Explain the accounting entries for the formation of a partnership.


Forming
Forming aa Partnership
Partnership
Partner’s initial investment should be recorded at the
fair market value of the assets at the date of their
transfer to the partnership.
E12-2 Meissner, Cohen, and Hughes are forming a
partnership. Meissner is transferring $50,000 of cash to
the partnership. Cohen is transferring land worth $15,000
and a small building worth $80,000. Hughes transfers cash
of $9,000, accounts receivable of $32,000 and equipment
worth $19,000. The partnership expects to collect $29,000
of the accounts receivable.
Instructions: Prepare the journal entries to record each of
the partners’ investments.
Chapter
12-20

LO 2 Explain the accounting entries for the formation of a partnership.


Forming
Forming aa Partnership
Partnership
E12-2 Meissner is transferring $50,000 of cash to
the partnership. Prepare the entry.
Cash

50,000

Meissner, Capital
50,000
Cohen is transferring land worth $15,000 and a small
building worth $80,000. Prepare the entry.

Chapter
12-21

Land

15,000

Building
Cohen, Capital
95,000

80,000

LO 2 Explain the accounting entries for the formation of a partnership.


Forming
Forming aa Partnership
Partnership
E12-2 Hughes transfers cash of $9,000, accounts
receivable of $32,000 and equipment worth $19,000.
The partnership expects to collect $29,000 of the
accounts receivable. Prepare the entry.

Chapter
12-22

Cash

9,000

Accounts receivable
Equipment
Allowance for doubtful accounts
3,000
Hughes, Capital
57,000

32,000
19,000

LO 2 Explain the accounting entries for the formation of a partnership.

Dividing
Dividing Net
Net Income
Income or
or Net
Net Loss
Loss
Partners equally share net income or net loss unless the
partnership contract indicates otherwise.

Closing Entries:
Close all Revenue and Expense accounts to Income
Summary.
Close Income Summary to each partner’s Capital
account for his or her share of net income or loss.
Close each partners Drawing account to his or her
respective Capital account.
Chapter
12-23

LO 3 Identify the bases for dividing net income or net loss.


Dividing
Dividing Net
Net Income
Income or
or Net
Net Loss

Loss
Income Ratios
Partnership agreement should specify the basis for
sharing net income or net loss. Typical income ratios:
Fixed ratio.
Ratio based on capital balances.
Salaries to partners and remainder on a fixed ratio.
Interest on partners’ capital balances and the
remainder on a fixed ratio.
Salaries to partners, interest on partners’ capital,
and the remainder on a fixed ratio.
Chapter
12-24

LO 3 Identify the bases for dividing net income or net loss.


Dividing
Dividing Net
Net Income
Income or
or Net
Net Loss
Loss

Discussion Question
Q12-7 Blue and Grey are discussing how
income and losses should be divided in a
partnership they plan to form. What factors
should be considered in determining the division

of net income or net loss?

See notes page for discussion
Chapter
12-25

LO 3 Identify the bases for dividing net income or net loss.