1、Advanced Accounting II,Topic: Partnerships,1,Partnerships: Objectives,Comprehend the legal characteristics of partnerships. Understand initial investment valuation and record keeping. Grasp the diverse nature of profit and loss sharing agreements and their computation. Value a new partners investmen
2、t in an existing partnership.,2,Objectives (cont.),Value a partners share upon retirement or death. Understand limited liability partnership characteristics.,3,1: Characteristics of Partnerships,4,Partnerships Formation, Operations, and Changes in Ownership InterestsA partnership is an association o
3、f 2 or more people carrying on business in common with a view to making a profitNo limit on the number of partners,Partnerships,Entity theory: partners own their share of the partnership, but not its individual assets Assets of the partnership are the joint property of all partners Each partner has
4、a claim to a share of the business profits Dissociation: partners can dissociate without dissolution,5,Partnerships,Partners have Mutual agency Either partner can bind the business to a contract so long as it is within regular business operations Unlimited personal liability Liability is for all of
5、the partnership debts, not just partnership sharePartnerships pay no taxes Partners pay tax individually on their share of the profits,6,Articles of Partnership,Written partnership agreement detailing: Products or services, line of business Partner rights & responsibilities Initial investment and va
6、lue assigned to noncash investments Additional investment conditions Asset withdrawals Profit and loss sharing Dissolution procedures,7,Partnership advantages,8,Versus proprietorships: Can raise more capital Combines expertise In a good partnership 1+1 2Versus companies Less expensive to organise No
7、 taxation of partnership income,Partnership disadvantages,9,Formulation of partnership agreement A new agreement is required each time a new partner joins or a partner withdrawsPersonal relationships among partners may cause problemsMutual agency and unlimited personal liability create personal obli
8、gations for each partner,Partnership Reporting,Financial reporting should provide for the needs of Partners Creditors of the partnership Government taxation authoritiesMain difference between partnership reporting and sole proprietor is the need for more than one owners equity account also need acco
9、unts to record profit share and withdrawals,10,Partnership Reporting,11,Capital account records: Initial investment Subsequent capital contributions Profit or loss distributions Any withdrawals of capitalBalance in capital account represents partners share of the partnerships net assets,2: Initial I
10、nvestment,12,Partnerships Formation, Operations, and Changes in Ownership Interests,Initial Investment,A partnership is started by Amy and Paul, each investing cash. If they invest other assets, the value of those assets should be agreed upon in advance.,13,Initial Investment-exercise,14,David and J
11、oan form a partnership to manufacture and sell computer software. They agree on the following values of their contributions: David: Cash $10,000; inventory $70,000; Accounts Payable $85,000; Accounts Receivable $25,000; equipment $600,000 (current market value $450,000) Joan: Cash $5000; software ma
12、rket value $100,000 Prepare the partnership entries,Initial Investment-exercise,15,Davids investment:,Initial Investment-exercise,16,Joans investment:,Initial Investment with Bonus or Goodwill,Partner initial investments, at fair value, may not represent their ownership. Individual talent Business c
13、onnections Customer base If they choose to be equal partners, must choose accounting method: Bonus method Adjustment within the capital accounts Goodwill method Goodwill is recorded on the books,17,Initial Investment with Bonus,Total fair value received is split, as desired, between partners Cola in
14、vests land and building worth $10 and $40. Crown invests cash and inventory at $7 and $35. Agree to have equal shares: (10 + 40 + 7 + 35) / 2 = $46 each,18,Initial Investment with Bonus,19,Colas capital account is recorded at less than the fair value of the assets contributed.Crowns capital account
15、is recorded at more than the fair value of the assets contributed.Is this fair?,Initial Investment with Goodwill,20,If Cola and Crown agreed to equal shares, we can use the larger contribution to determine an implied value of the firm: Colas contribution:10+40 = 50 Crowns contribution: 7+35 = 42If e
16、ach partner share equals 50% of the firm then use Colas contribution to calculate an implied total value of (50x2) $100Each partners contribution will be valued at $50, with Crown recording goodwill of $8,Initial Investment with Goodwill,Colas 50%(100) $50 He invests:Land $10Building $40 $50,Crowns
17、50%(100) $50 He invests:Cash $ 7Inventory $35 $42Goodwill $8,21,Initial Entry with Goodwill,22,Bonus or goodwill method?,23,This choice is a matter for agreement between the partners,Partner drawings and withdrawals,24,Partnership agreements usually allow partners to withdraw cash or other assets fr
18、om the business in anticipation of profits that they expect the business to earn Amounts that are withdrawn such as salaries are called Drawings and are treated in exactly the same way as for proprietorships A separate drawing account is often used during the year then closed to the partners capital
19、 account at the end of the year,Partner Accounts,Each partner has his/her own accounts for Capital Drawings (periodic, salary-like, amounts) Withdrawals (other, large, unusual amounts) Investments increase Capital Drawings and withdrawals are closed to Capital Income Summary or Revenue and Expense S
20、ummary is closed to Capital.,25,Sample Partner Closing Entries,Drawings / withdrawals are closed to individual capital accounts.,Income is shared between the partners. A loss would cause the entry to be reversed. It is possible for some partners to have losses while others have profits.,26,3: Sharin
21、g Profit and Loss,27,Partnerships Formation, Operations, and Changes in Ownership Interests,Profit/ Loss Sharing Agreements,The partnership articles should clearly state the means of distributing profits and distributing losses. If not specified in the partnership agreement profits and losses must b
22、e shared equally Items commonly considered Bonus Salary Interest on capital invested Based on average, beginning or ending capital balance Sharing of remaining amounts,28,Allocating Income,Partners allowances for bonus, salary and interest are allocated to them, whether or not sufficient profits exi
23、st. Remaining profits (or deficit) is then split according to the agreed-upon proportions.These are general procedures. The partnership articles provide the specific requirements.,29,Bonus and Salary,Salaries are generally pre-determined amountsBonuses are often based on partnership profits and may
24、be before or after: (a) salary allowances and (b) bonus. If the bonus is after both: Bonus = b% x (Net income Salary Bonus),30,Interest Allowances and Capital,Interest Allowances are generally based on a measure of the partners capital Beginning of the year capital balance Average* capital balance f
25、or the year Weighted average balance Ending* capital balance Beginning balance withdrawals + investments * Periodic drawings are often ignored, although withdrawals are considered,31,Sharing profits: stated fractions,32,Jack and Joe have agreed to share profits 2/3 to Jack and 1/3 to Joe. Net profit
26、 for the year is $90,000 Jacks Capital account will be credited with $60,000 Joe is Capital account will be credited with $30,000 If the partnership suffered a loss then Capital accounts would be debited in the same proportions,Sharing profits: based on capital contributions,33,Profits and losses ma
27、y be allocated in proportion to capital contributions in the business assume the following contributions:If the business earned $120,000 profit how would this be distributed among the partners?,Sharing profits: based on capital contributions,34,Sharing profits: salaries,35,Posh and Becks are in part
28、nership with opening capital balances of $80,000 and $100,000 respectively. Posh is allocated an annual salary of $43,000. Becks is allocated an annual salary of $35,000. Any remaining profit is divided equally. Partnership profit of $96,000 was recorded this year. Determine the allocation of the pr
29、ofit between the partners,Sharing profits: salaries,36,Sharing profits: salaries,37,How would the calculation be affected if the profit was only$67,600?,Exercise - Sharing profits: salaries and interest,38,Posh and Becks are in partnership with opening capital balances of $80,000 and $100,000 respec
30、tively. Posh is allocated an annual salary of $43,000. Becks is allocated an annual salary of $35,000. Each partner earns 8% interest on their beginning capital balance Any remaining profit is divided equally. Partnership profit of $96,000 was recorded this year. Determine the allocation of the prof
31、it between the partners,Sharing profits: salaries and interest,39,Sharing profits: contribution and bonus,40,Debbie and Nancy formed a partnership in which Debbie invested $60,000 and Nancy invested $40,000. They have agreed to share profits as follows: The first $50,000 of profit to be allocated on
32、 the basis of partners capital contributions The next $60,000 of profit is to be allocated as bonus with Debbie receiving $24,000 and Nancy receiving $36,000 Any remaining amount is to be allocated equally Net profit for the year is $125,000,Sharing profits: contribution and bonus,41,Exercise: Shari
33、ng Profits,Tom and Betty agree to share profits and losses: Tom and Betty have $60 and $30 salary allowances Betty has a bonus of 50% of profits in excess of $500 Each have interest allowances of 10% of beginning capital Tom Capital, 1/1 $400 Betty Capital, 1/1 $350 Remaining profits or losses are s
34、hared Tom 60%, Betty 40%. Partnership profits are $660 for the year. Calculate the allocation to each partner,42,Share Profits of $660,Bonus = 50%(660 - 500) = 80 Tom Interest = 10%(400) = 40 Betty Interest = 10%(350) = 35 60%(415) = 249; 40%(415) = 166,43,Share Profits of $120,Assume instead that i
35、ncome was only $120.Calculate the allocation for each partner,44,Share Profits of $120,Bonus = zero, income does not exceed threshold Tom Interest = 10%(400) = 40 Betty Interest = 10%(350) = 35 60%(-45) = -27; 40%(-45) = -18,45,Question,46,Are these salaries, interest payments and bonuses business e
36、xpenses in the usual sense?,Loan accounts,47,Loans from partners to the partnership shown as payables on partnership balance sheet Interest is usually required to be paid (note: interest is not a requirement on capital investments but may be part of the partnership agreement) Interest paid on loans
37、from partners is recorded as an operating expense Partnership may also make loans to partners,4: Admitting a New Partner,48,Partnerships Formation, Operations, and Changes in Ownership Interests,New partnerships,49,Addition of a new partner or withdrawal of an existing partner dissolves the partners
38、hip Business may continue under the same name but legally is a new partnership Three ways in which new partners can be admitted,Admitting a New Partner,A current partner assigns interest in profits and assets to third party. New partner purchases interest from existing partner. Goodwill method Bonus
39、 method New partner invests directly in partnership. Goodwill method Bonus method,50,Assignment,Assignment gives the assignee right to a share of future earnings and share of assets in liquidation Not a partner No share in management,51,Buy from Partner: Simple,Replacement of partner: Roberta and Ma
40、ry have partnership whose balance sheet shows:Roberta agrees to sell per share to Barry for $150,000,52,Buy from Partner: Simple,53,Entry to record the transfer:Amount paid has no effect on the Journal entry,Buy from Partner: Simple,Alfano and Bailey have capital balances of $50 each and each have a
41、 50% interest in the firm. Cobb buys half of Alfanos interest for $25.,54,Buy from Partner: Goodwill,Don and Ed have capital of $50 and $40 with 50% interest each. Fay will pay $60 directly to the partners and receive 50% interest in the firm. Don and Ed each keep 25%. Assets are at fair value.The g
42、oodwill increases Don & Eds capital each by $15.,55,Goodwill Revalues Capital,If the partners wanted to realign the capital, Don and Ed had equal shares:Fay would pay $35 to Don and $25 to Ed,56,Entries for Purchase from Partner,Entries for Fays admission, under goodwill method, realignment of accou
43、nts:,57,Goodwill Revalues Capital,If the partners had not wanted to realign the capital, the capital of Don and Ed would each be reduced by $30 to transfer the $60 to Fay:,58,Entries for Purchase from Partner,Entries for Fays admission, under goodwill method, aligning accounts:,59,Buy from Partner:
44、Bonus,If Don and Ed had decided not to revalue the capital or record goodwill, the bonus method is used.Fays capital is 50%(90) = $45 but she paid $50 Bonus is paid to Don and Ed (they receive $25 each),60,Entries for Purchase from Partner,Entries for Fays admission, under bonus method:,61,Invest in
45、 Business: Goodwill,Approach here is different cash paid by new partner goes into the businessAndrew and Boyles have capital balances of $40 and $40 and share equally in the firm.Criner will be admitted with an investment of $50 cash. All three will have equal shares. Net assets are at fair value; g
46、oodwill will be recorded.,62,Invest in Business: Goodwill,63,Criner: $130*1/3 = $43.3, but she pays $50 so goodwill goes to old partners.Implied firm value is based on Criners investment.,Investment and Goodwill Add to Capital (Goodwill to Old Partners),Capital of $80 at the start, increases by the
47、$20 goodwill and the $50 cash investment.,64,Entries for Investment in Business Goodwill to old partners,65,Entries for Criners investment, under goodwill method,Invest in Business: Goodwill,Andrew and Boyles have capital balances of $40 and $40 and share equally in the firm.Criner will be admitted
48、with an investment of $50 cash. Criner will be given a 40% share; Andrew and Boyles will each have 30%. Net assets are at fair value; goodwill will be recorded.,66,Invest in Business: Goodwill,67,Criner: $130*40% = $52, but she pays $50 so goodwill goes to new partner. Implied firm value is based on
49、 old partners capital and retained interest.,Investment and Goodwill Add to Capital (Goodwill to New Partner),Capital of $80 at the start, increases by the $3.3 goodwill and the $50 cash investment.,68,Entries for Investment in Business goodwill to new partner,69,Entries for Criners investment, unde
50、r goodwill method where Criner recognises the goodwill:,Invest in Business: Bonus to old partners,70,Andrew and Boyles decide not to revalue the business assets, and Criner invests $50 cash in the business for a 1/3 interest. Criners new capital = 1/3 of the total $130. Since she invests $50 cash for a $43.33 interest, the $6.66 bonus is transferred to the old partners.,
