Financial accounting 3e IFRS edtion willey appendix b

WILEY

IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
F-1

Westmont College


APPENDIX PREVIEW
In this appendix, we discuss reasons why businesses select the partnership form of organization. We
also explain the major issues in accounting for partnerships.

Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
F-2


APPENDIX

F

Accounting for Partnerships

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

F-3

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.


Partnership Form of Organization
Learning Objective 1

Partnership: An association of two or more persons to carry on as co-

Identify the characteristics of the
partnership form of business organization.

owners of a business for profit.

Type of Business:

F-4



Small retail, service, or manufacturing companies.



Accountants, lawyers, and doctors.

LO 1


Characteristics of 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.

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LO 1


Characteristics of Partnerships

LIMITED LIFE



Dissolution occurs whenever a partner withdraws or a new partner is admitted.



Dissolution does not mean the business ends.

UNLIMITED LIABILITY



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

LO 1


Characteristics of 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.

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LO 1

Organizations with Partnership Characteristics

Special partnership forms are:

1.

LIMITED PARTNERSHIPS,

2.

LIMITED LIABILITY PARTNERSHIPS,

3.

LIMITED LIABILITY COMPANIES, and

4.

“S” CORPORATIONS.

Illustration F-2
Advantages and disadvantages of a partnership

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LO 1


The Partnership Agreement

Should specify relationships among the partners:

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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.

LO 1


Basic Partnership Accounting
Learning Objective 2

Forming a Partnership

Explain the accounting entries for the formation of a
partnership.

Illustration: A. Rolfe and T. Shea combine their proprietorships to start a partnership named U.K. Software. The firm
will specialize in developing financial modeling software packages. Rolfe and Shea have the following assets prior to
the formation of the partnership.

Illustration F-3
F-10

Book and fair values of assets invested

LO 2


Forming a Partnership

Illustration F-3
Book and fair values of assets
invested

Prepare the entry to record the investment of A. Rolfe.

Cash

8,000

Equipment

4,000

A. Rolfe, Capital

F-11

12,000
LO 2


Forming a Partnership

Illustration F-3
Book and fair values of assets
invested

Prepare the entry to record the investment of T. Shea.
Cash

9,000

Accounts Receivable

4,000

Allowance for Doubtful Accounts

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T. Shea, Capital

12,000

1,000
LO 2


Dividing Net Income or Net Loss
Learning Objective 3

Partners equally share net income or net loss unless the partnership contract indicates

Identify the bases for dividing
net income or net loss.

otherwise.
CLOSING ENTRIES:

1.

Debit each revenue account for its balance, and credit Income Summary for total revenues. Debit Income

Summary for total expenses, and credit each expense account for its balance.

2.

Debit Income Summary for its balance, and credit each partner’s capital account for his or her share of net
income. Or, credit Income Summary, and debit each partner’s capital account for his or her share of net loss.

3.

Debit each partner’s capital account for the balance in that partner’s drawing account, and credit each partner’s
drawing account for the same amount.

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LO 3


Dividing Net Income or Net Loss

Illustration: AB Company has net income of £32,000 for 2017. The partners, L. Arbor and D. Barnett, share net
income and net loss equally. Drawings for the year were Arbor £8,000 and Barnett £6,000. The last two closing
entries are:

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LO 3


Dividing Net Income or Net Loss

Assume that the beginning capital balance is £47,000 for Arbor and £36,000 for Barnett. The capital and drawing
accounts will show the following after posting the closing entries.

Illustration F-4
Partners’ capital and drawing accounts after closing

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LO 3


Dividing Net Income or Net Loss

INCOME RATIOS
Partnership agreement should specify the basis for sharing net income or net loss. Typical income ratios:

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

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.

LO 3


Dividing Net Income or Net Loss

Illustration: Sara King and Ray Lee are copartners in Kingslee Company. The partnership agreement provides for
(1) salary allowances of €8,400 to King and €6,000 to Lee, (2) interest allowances of 10% on capital balances at the
beginning of the year, and (3) dividing the remainder equally. Capital balances on January 1 were King €28,000,
and Lee €24,000. In 2017, partnership net income is €22,000.
Prepare a schedule showing the distribution of net income.

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LO 3


Dividing Net Income or Net Loss

Illustration F-5
Income statement with division of net income

F-18

LO 3


Dividing Net Income or Net Loss

Journalize the allocation of net income in each of the situations above.

Dec. 31

Income Summary

22,000

Sara King, Capital
Ray Lee, Capital
12,400
9,600

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LO 3


Dividing Net Income or Net Loss

Illustration: Assume Kingslee’s net income is only €18,000.

Illustration F-6
Division of net income—income deficiency

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LO 3


Partnership Financial Statements

Learning Objective 4
Describe the form and content of
partnership financial statements.

Illustration F-7
Partners’ capital statement

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LO 4


Partnership Financial Statements

Illustration F-8
Equity section of a partnership
statement of financial position

The income statement for a partnership is identical to the income statement for a proprietorship, except for the
division of net income.

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LO 4


Liquidation of a Partnership
Learning Objective 5

Ends both the legal and economic life of the entity.

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

In liquidation, sale of non-cash assets for cash is called realization. To liquidate, it is necessary to:

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1.

Sell non-cash assets for cash and recognize a gain or loss on realization.

2.

Allocate gain/loss on realization to the partners based on their income ratios.

3.

Pay partnership liabilities in cash.

4.

Distribute remaining cash to partners on the basis of their capital balances.

LO 5


Liquidation of a Partnership

Illustration: Ace Company is liquidated when its ledger shows the assets, liabilities, and equity accounts are
reported as follows:

Illustration F-9
Account balances prior to liquidation

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LO 5


Liquidation of a Partnership

No Capital
Deficiency

Illustration: Ace Company agree to liquidate the partnership on the following terms. (1) The non-cash assets of the
partnership will be sold to Jackson Enterprises for €75,000 cash. (2) The partnership will pay its partnership
liabilities. The income ratios of the partners are 3:2:1, respectively.

Step 1 - Record the realization of noncash assets.
Cash 75,000
Accumulated Depreciation—Equipment 8,000

Accounts Receivable
Inventory

18,000

Equipment

35,000

Gain on Realization
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15,000

15,000
LO 5