1 / 50

Partnerships – Formation, Operations, and Changes in Ownership Interests

Partnerships – Formation, Operations, and Changes in Ownership Interests. Chapter 15. Learning Objective 1. Comprehend the legal characteristics of partnerships. Partnership Characteristics. It is an association of two or more persons who co-own a business for a profit.

jenniferwhaley
Télécharger la présentation

Partnerships – Formation, Operations, and Changes in Ownership Interests

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Partnerships – Formation,Operations, and Changes inOwnership Interests Chapter 15

  2. Learning Objective 1 Comprehend the legal characteristics of partnerships.

  3. Partnership Characteristics It is an association of two or more persons who co-own a business for a profit. The legal life of a partnership terminates with the admission of a new partner, the withdrawal or death of a partner, voluntary dissolution by the partners, or involuntary dissolution such as bankruptcy proceedings.

  4. Articles of Partnership A partnership may be formed by a simple oral agreement among two or more people to operate a business for profit.

  5. Articles of Partnership Such agreements should specify: The types of products and services to be provided Each partner’s rights and responsibilities Each partner’s initial investment Additional investment conditions Asset drawing provisions Profit and loss sharing formulas Procedures for dissolving the partnership

  6. Partnership Financial Reporting The accounting reports are designed to meet the needs of three user groups… The partners Partnership creditors Internal Revenue Service

  7. Learning Objective 2 Understand initial investment valuation and record keeping.

  8. Initial Investment in a Partnership Ashley and Becker each invest $20,000 cash in a new partnership. Cash 20,000 Ashley, Capital 20,000 To record Ashley’s original investment of cash Cash 20,000 Becker, Capital 20,000 To record Becker’s original investment of cash

  9. C. Cola R. Crown Fair Value Fair Value Cash $ — $ 7,000 Land (cost to C. Cola, $5,000) 10,000 — Building (cost to C. Cola, $30,000) 40,000 — Inventory (cost to R. Crown, $28,000) — 35,000 Total $50,000 $42,000 Noncash Investments C. Cola and R. Crown enter into a partnership.

  10. Land 10,000 Building 40,000 C. Cola, Capital 50,000 To record C. Cola’s original investment of land and building at fair value Noncash Investments

  11. Cash 7,000 Inventory 35,000 R. Crown, Capital 42,000 To record R. Crown’s original investment of cash and inventory items at fair value Noncash Investments

  12. Bonus or Goodwillon Initial Investment The partnership agreement specifies equal capital interests. Bonus Approach C. Cola, Capital 4,000 R. Crown, Capital 4,000 To establish equal capital interests of $46,000 by recording a $4,000 bonus from C. Cola to R. Crown

  13. Bonus or Goodwillon Initial Investment Goodwill approach Goodwill 8,000 R. Crown, Capital 8,000 To establish equal capital interests of $50,000 by recognizing R. Crown’s investment of an $8,000 unidentifiable asset

  14. Drawings Regular withdrawals are called drawings, drawing allowances, or sometimes salary allowances. Debit Drawing and credit Cash. At period end, credit Drawing and debit each partner’s Capital.

  15. Loans and Advances Loans and advances to the partnership and accrued interest are regarded as liabilities of the partnership. Loans and advances to partners are regarded as assets of the partnership.

  16. Partnership Operations Ratcliffe and Yancey are partners sharing profits in a 60:40 ratio, respectively.

  17. Partnership Operations Equity Accounts, 2003 Partnership net income 2003 $34,500 Ratcliffe capital January 1, 2003 40,000 Ratcliffe additional investment 2003 5,000 Ratcliffe drawing 2003 6,000 Yancey capital January 1, 2003 35,000 Yancey drawing 2003 9,000 Yancey withdrawal 2003 3,000

  18. 60% 40% Ratcliffe Yancey Total Capital balances 1/1/03 $40,000 $35,000 $75,000 Add: Additional investments 5,000 — 5,000 Deduct: Withdrawals — – 3,000 – 3,000 Deduct: Drawings – 6,000– 9,000–15,000 Net contributed capital 39,000 23,000 62,000 Add: Net income for 2003 20,700 13,800 34,500 Capital balances 12/31/03 $59,700 $36,800 $96,500 Format for a Statementof Partners’ Capital Ratcliffe and Yancey Statement of Partners’ CapitalFor the Year Ended 12/31/2003

  19. Closing Entries December 31, 2003 Revenue and Expense Summary 34,500 Ratcliffe, Capital 20,700 Yancey, Capital 13,800 To divide net income for the year 60% to Ratcliffe and 40% to Yancey

  20. Closing Entries December 31, 2003 Ratcliffe, Capital 6,000 Yancey, Capital 9,000 Ratcliffe, Drawing 6,000 Yancey, Drawing 9,000 To close partner drawing accounts to capital accounts

  21. Learning Objective 3 Grasp the diverse nature of profit and loss sharing agreements and their computation.

  22. Profit and Loss SharingAgreements Equal division of partnership income is required in the absence of a profit and loss sharing agreement.

  23. Service Considerations inProfit and Loss Sharing Agreements A partner who devotes time to the partnership business while other partners work elsewhere may receive a salary allowance. Salary allowances are also used to compensate for differences in the fair value of the talents of partners.

  24. Salary Allowance in ProfitSharing Agreements Bob, Gary, and Pete are partners. The partnership agreement provides that Bob and Gary receive salary allowances of $12,000 each, with the remaining income allocated equally. Partnership net income is $60,000 for 2003 and $12,000 for 2004.

  25. Bob Gary Pete Net income $60,000 Salary allowances to Bob and Gary (24,000) $12,000 $12,000 Remainder to divide 36,000 Divided equally (36,000) 12,000 12,000 $12,000 Remainder to divide 0 Net income allocation $24,000 $24,000 $12,000 Income Allocation Schedule: 2003

  26. Income Allocation Schedule: 2004 Bob Gary Pete Net income $12,000 Salary allowances to Bob and Gary (24,000) $12,000 $12,000 Remainder to divide (12,000) Divided equally 12,000 (4,000) (4,000) $(4,000) Remainder to divide 0 Net income allocation $ 8,000 $ 8,000 $(4,000)

  27. Journal Entries December 31, 2003 Revenue and Expense Summary 60,000 Bob, Capital 24,000 Gary, Capital 24,000 Pete, Capital 12,000 Partnership income allocation for 2003

  28. Journal Entries December 31, 2004 Revenue and Expense Summary 12,000 Pete, Capital 4,000 Bob, Capital 8,000 Gary, Capital 8,000 Partnership income allocation for 2004

  29. Bonus and Salary Allowances The partnership agreement provides that Bob receive a bonus of 10% of partnership net income. Bob and Gary receive salary allowances of $10,000 and $8,000, respectively, and the remaining income is allocated equally. Partnership net income is $60,000 for 2003 and $12,000 for 2004.

  30. Bob Gary Pete Net income $60,000 Bonus to Bob (6,000) $ 6,000 Remainder to divide 54,000 Salary allowances to Bob and Gary (18,000) 10,000 $ 8,000 Remainder to divide 36,000 Divided equally (36,000) 12,000 12,000 $12,000 Remainder to divide 0 Net income allocation $28,000 $20,000 $12,000 Income Allocation Schedule: 2003

  31. Bob Gary Pete Net income $12,000 Bonus to Bob (1,200) $ 1,200 Remainder to divide 10,800 Salary allowances to Bob and Gary (18,000) 10,000 $8,000 Remainder to divide (7,200) Divided equally 7,200 (2,400) (2,400) $(2,400) Remainder to divide 0 Net income allocation $ 8,800 $5,600 $(2,400) Income Allocation Schedule: 2004

  32. Ace Butch Capital balances 1/1/2003 $20,000 $20,000 Investment April 1 2,000 — Withdrawal July 1 — (5,000) Investment September 1 3,000 — Withdrawal October 1 — (4,000) Investment December 28 — 8,000 Capital balances 12/31/2003 $25,000 $19,000 Income Allocated in Relationto Partnership Capital

  33. Weighted Beginning Ending Average Capital Capital Capital Investment Investment Investment Ace $20,000 $25,000 $22,500 Butch 20,000 19,000 16,500 Total $40,000 $44,000 $39,000 Comparison of Capital Bases

  34. Alternatives Net income of $100,000 is divided on the basis of capital balances. Beginning Capital Balances Ace ($100,000 × 20/40) $ 50,000 Butch ($100,000 × 20/40) 50,000 Total income $100,000

  35. Alternatives Ending Capital Balances Ace ($100,000 × 25/44) $ 56,818.18 Butch ($100,000 × 19/44) 43,181.82 Total income $100,000.00 Average Capital Balances Ace ($100,000 × 22.5/39) $ 57,692.31 Butch ($100,000 × 16.5/39) 42,307.69 Total income $100,000.00

  36. Interest Allowanceson Partnership Capital An agreement may provide for interest allowances on partnership capital in order to encourage capital investments, as well as salary allowances. Remaining profits are then divided equally or in any other ratio specified in the profit sharing agreement.

  37. Learning Objective 4 Value new partners’ investment in an existing partnership.

  38. Changes in Partnership Interest The existing legal partnership entity is dissolved when a new partner is admitted or an existing partner retires or dies.

  39. Changes in Partnership Interest Assignment of an interest to a third party Admission of a new partner Purchase of an interest from existing partners Investing in an existing partnership

  40. Learning Objective 5 Value partner’s share upon retirement or death.

  41. Profit and Capital Percentage Loss Balances of Capital Percentage Bonnie $ 70,000 35% 40% Clyde 50,000 25 20 Dillinger 80,000 40 40 Total capital $200,000 100% 100% Dissolution of a Continuing PartnershipThrough Death or Retirement

  42. Dissolution of a Continuing PartnershipThrough Death or Retirement Dillinger decides to retire. The partners agree that the business is undervalued on the partnership books and that Dillinger will be paid $92,000.

  43. Bonus to Retiring Partner Dillinger, Capital 80,000 Bonnie, Capital 8,000 Clyde, Capital 4,000 Cash 92,000 Dillinger, Capital 80,000 Goodwill 12,000 Cash 92,000

  44. Reevaluation of TotalPartnership Capital Goodwill (other assets) 30,000 Bonnie, Capital 12,000 Clyde, Capital 6,000 Dillinger, Capital 12,000

  45. Payment to Retiring PartnerLess than Capital Balance Suppose that Dillinger is paid $72,000 in final settlement of his capital interest.

  46. Overvalued Assets Written Down Bonnie, Capital 8,000 Clyde, Capital 4,000 Dillinger, Capital 8,000 Net assets 20,000 Dillinger, Capital 72,000 Cash 72,000

  47. Bonus to Continuing Partners Dillinger, Capital 80,000 Bonnie, Capital 5,333 Clyde, Capital 2,667 Cash 72,000

  48. Learning Objective 6 Understand limited liability partnership characteristics.

  49. Limited Partnerships The limited partnership consists of at least one general partner and one or more limited partners. The limited partner is excluded from the management of the business.

  50. End of Chapter 15

More Related