11-112-1 accounting for partnerships and limited liability companies 12
TRANSCRIPT
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11-112-1
Accounting for Partnerships and Limited Liability
Companies
12
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Learning Objective 13-1
Describe the nature of the adjusting process.
Learning Objective 13-1
Describe the nature of the adjusting process.
9-2
Insert Chapter Objectives
Accounting for Partnerships and Limited Liability Companies
1 Describe the characteristics of proprietorships, partnerships, and limited liability companies.
2 Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership.
After studying this chapter, you should be able to:
12-2
3 Describe and illustrate the accounting for partnership admission and withdrawal.
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4 Describe and illustrate the accounting for liquidating a partnership.
5 Prepare the statement of partnership equity.
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Accounting for Partnerships and Limited Liability Companies (continued)
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Describe the characteristics of proprietorships, partnerships, and limited liability companies.
1
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1
Four Most Common Legal Forms of Business
1. Proprietorship
2. Corporation
3. Partnership
4. Limited liability company
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A proprietorship is a company owned by a single individual.
Proprietorship
• Lawyers
• Architects
• Realtors
• Physicians
1
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Characteristics of a Proprietorship
1. Simple to form
2. No limitation on legal liability
3. Not taxable
4. Limited life
5. Limited ability to raise capital (funds)
1
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A partnership is an association of two or more individuals who own and manage a company for profit.
Partnership
Less widely used than proprietorships.
1
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Characteristics of a Partnership
1. Moderate to form
2. No limitation on legal liability
3. Not taxable
4. Limited life
5. Limited ability to raise capital (funds)
(continued)
1
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Characteristics of a Partnership (continued)
6. Co-ownership of partnership property
7. Mutual agency
8. Participation in income
1
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Limited Partnership
A variant of the regular partnership is a limited partnership. This form of partnership allows partners who are not involved in the operations of the partnership to retain limited liability.
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Limited Liability Companies
A limited liability company (LLC) is a form of legal entity that provides limited liability to its owners, but is treated as a partnership for tax purposes.
1
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Characteristics of a Limited Liability Partnership
1. Moderate to form
2. Limited legal liability
3. Not taxable
4. Unlimited life
5. Moderate ability to raise capital (funds)
1
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Ease of Formation
Proprietorship SimplePartnership Moderate
LLC Moderate
Characteristics of Proprietorships, Partnerships, and Limited Liability Companies
(continued)
1
Exhibit 1
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Legal Liability
Proprietorship No limitationPartnership No limitation
LLC Limited liability
(continued)
Characteristics of Proprietorships, Partnerships, and Limited Liability Companies (continued)
Exhibit 1
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Taxation
Proprietorship Nontaxable*Partnership Nontaxable*
LLC Nontaxable**
*Pass-through entity**Pass-through entity by election
(continued)
1
Characteristics of Proprietorships, Partnerships, and Limited Liability Companies (continued)
Exhibit 1
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(continued)
Limitation on Life of Entity
Proprietorship LimitedPartnership Limited
LLC Unlimited
1
Characteristics of Proprietorships, Partnerships, and Limited Liability Companies (continued)
Exhibit 1
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Access to Capital
Proprietorship LimitedPartnership Limited
LLC Moderate
1
Characteristics of Proprietorships, Partnerships, and Limited Liability Companies (concluded)
Exhibit 1
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Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership.
2
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Forming a Partnership
Joseph Stevens and Earl Foster agree to combine their hardware businesses in a partnership. Each is to contribute certain amounts of cash and other assets. They also agree that the partnership is to assume the liabilities of the separate businesses.
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The entry to record the assets and liabilities contributed by Stevens is as follows:
2
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A similar entry would record the assets contributed and the liabilities transferred by Foster. In each entry, the noncash assets are recorded at values agreed upon by the partners. These values normally represent current market values.
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If a limited liability company is formed the following entry is made:
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Example Exercise 12-12
Journalize Partner’s Original Investment
Reese Howell contributed equipment, inventory, and $34,000 cash to a partnership. The equipment had a book value of $23,000 and market value of $29,000. The inventory had a book value of $60,000, but only had a market value of $15,000, due to obsolescence. The partnership also assumed a $12,000 note payable owed by Howell that was used originally to purchase the equipment.
Provide the journal entry for Howell’s contribution to the partnership.
12-24
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Cash………………………………. 34,000Inventory………………………….. 15,000Equipment………………………… 29,000
Notes Payable…………………. 12,000Reese Howell, Capital………… 66,000
Example Exercise 12-1 (continued) 2
12-25
For Practice: PE 12-1A, PE 12-1B
Follow My Example 12-1
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The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to receive a monthly allowance of $5,000 ($60,000 annually) and Mills is to receive $4,000 a month ($48,000 annually). If there is any remaining net income, it is to be divided equally. The firm had a net income of $150,000 for the year.
Dividing Income—Services of Partners
2
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J. Stone C. Mills Total
Annual salary allowance $60,000 $48,000 $108,000Remaining income 21,000 21,000 42,000
Division of net income $81,000 $69,000$150,000
Division of Net Income
2
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Division of Net Income
2
J. Stone C. Mills Total
Annual salary allowance $60,000 $48,000 $108,000Remaining income 21,000 21,000 42,000
Division of net income $81,000 $69,000$150,000
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Dividing Income—Services of Partners and Investments
The partnership agreement for Stone and Mills divides income as follows:1. Monthly salary allowance of $5,000 for Stone
and $4,000 for Mills.2. Interest of 12% on each partner’s capital
balance on January 1.3. If there is any remaining net income, it is to be
divided equally between the partners.
2
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Salary allowance $60,000 $48,000 $108,000
Each partners’ annual salary is calculated.
J. Stone C. Mills Total
2
$5,000 × 12 $4,000 × 12
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Salary allowance $60,000 $48,000 $108,000
Interest allowance 19,200
Interest on each partner’s January 1 capital balance is determined.
J. Stone C. Mills Total
12% × Stone’s capital account balance on Jan.
1 of $160,000
2
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Salary allowance $60,000 $48,000 $108,000
Interest allowance 19,200 14,400
Interest on each partner’s January 1 capital balance is determined.
J. Stone C. Mills Total
12% × Mill’s capital account balance on Jan.
1 of $120,000
2
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Salary allowance $60,000 $48,000 $108,000
Interest allowance 19,200 14,400 33,600
Interest on each partner’s January 1 capital balance is determined.
J. Stone C. Mills Total
2
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Salary allowance $60,000 $48,000 $108,000
Interest allowance 19,200 14,400 33,600
Remaining income 4,200 4,200 8,400
The remaining income is divided equally.
J. Stone C. Mills Total
Net income $83,400 $66,600 $150,000
2
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2
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Assume the same facts as before except that the net income is only $100,000. In this case, the total of the allowance exceeds the net income by $41,600 ($100,000 – $141,600).
Dividing Income—Allowances Exceed Net Income
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J. Stone C. Mills Total
Salary allowance $60,000 $48,000 $108,000Interest allowance 19,200 14,400 33,600 Total $79,200 $62,400 $141,600
Net income of $100,000 is divided.
This amount exceeds net
income by $41,600.
2
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J. Stone C. Mills Total
Salary allowance $60,000 $48,000 $108,000Interest allowance 19,200 14,400 33,600 Total $79,200 $62,400 $141,600Deduct excess of
allowance over income 20,800 20,800 <41,600>Net income $58,400 $41,600 $100,000
Net income of $100,000 is divided.
2
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Example Exercise 12-22
Dividing Partnership Net Income
Steve Prince and Chelsy Bernard formed a partnership, dividing income as follows:
1. Annual salary allowance to Prince of $42,000.2. Interest of 9% on each partner’s capital balance on
January 1.3. Any remaining net income divided equally.
Prince and Bernard had $20,000 and $150,000 in their January 1 capital balances, respectively. Net income for the year was $240,000.
How much net income should be distributed to Prince?
12-39
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Example Exercise 12-2 (continued) 2
Monthly salary $ 42,000Interest (9% × $20,000) 1,800Remaining income 91,350*Total distributed to Prince $135,150
*[$240,000 – $42,000 – $1,800 – $13,500 ($150,000 × 9%)] × 50%
12-40
For Practice: PE 12-2A, PE 12-2B
Follow My Example 12-2
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Describe and illustrate the accounting for partner admission and withdrawal.
3
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1. Purchasing an interest from one or more of the current partners.
2. Contributing assets to the partnership.
A person may be admitted to a partnership only with the consent of all the current partners by:
Admitting a Partner
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3
Two Methods of Admitting a Partner
(continued)
Exhibit 2
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Two Methods of Admitting a Partner (continued)
Exhibit 2
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Partners Tom Andrews and Nathan Bell have capital balances of $50,000 each. On June 1, each sells one-fifth of his equity to Joe Canter for $10,000 in cash.
Purchasing an Interest in a Partnership
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The only entry required in the partnership accounts is as follows:
3
For a limited liability company, the following entry is required:
Tom Andrews, Member Equity 10,000Nathan Bell, Member Equity 10,000 Joe Canter, Member Equity 20,000
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The effect of the transaction on the partnership accounts is presented in the following diagram:
3
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Contributing Assets to a Partnership
Partners Tom Andrews and Nathan Bell each have capital balances of $50,000. On June 1, Joe Canter contributes $20,000 cash to Bring It Consulting for ownership equity of $20,000.
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The entry to record this transaction is as follows:
For a limited liability company, the following entry is required:
3
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The effect of the transaction on the partnership accounts is presented in the following diagram:
3
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Revaluation of Assets
If the asset accounts do not reflect approximate current market values when a new partner is admitted, the accounts should be adjusted (increased or decreased) before the new partner is admitted.
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Partners Andrews and Bell each have capital balances of $50,000. The balance in Merchandise Inventory is $14,000 and the current replacement value is $17,000. The partners share net income equally.
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The entry to record this transaction is as follows:
For a limited liability company, the following entry is required:
3
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Example Exercise 12-33
Revaluing and Contributing Assets to a Partnership
Blake Nelson invested $45,000 in the Lawrence & Kerry partnership for ownership equity of $45,000. Prior to the investment, land was revalued to a market value of $260,000 from a book value of $200,000. Lynne Lawrence and Tim Kerry share net income in a 1:2 ratio.a. Provide the journal entry for the revaluation of
land.b. Provide the journal entry to admit Nelson.
12-54
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Example Exercise 12-3 (continued) 3
b. Cash………………………………….. 45,000 Blake Nelson, Capital…………...
45,000
a. Land………………………………….. 60,000 Lynne Lawrence, Capital………
20,000¹ Tim Kerry, Capital……………….
40,000²¹$60,000 × 1/3²$60,000 × 2/3
12-55
For Practice: PE 12-3A, PE 12-3B
Follow My Example 12-3
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3
Partner BonusesExhibit 3
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On March 1, the partnership of Marsha Jenkins and Helen Kramer admit Alex Diaz as a new partner. The assets of the old partnership are adjusted to current market values and the resulting capital balances for Jenkins and Kramer are $20,000 and $24,000, respectively.
Partner Bonuses
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Jenkins and Kramer agree to admit Diaz as a partner for $31,000. In return, Diaz will receive a one-third equity in the partnership and will share income and losses equally with Jenkins and Kramer.
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Equity of Jenkins $20,000Equity of Kramer 24,000Diaz’s Contribution 31,000Total equity after admitting Diaz $75,000Diaz’s interest (1/3 × $75,000) $25,000
Diaz’s contribution $31,000Diaz’s equity after admission 25,000Bonus paid to Jenkins and Kramer $ 6,000
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The entry to record this transaction is as follows:
For a limited liability company, the following entry is required:
(1/2 of $6,000)
3
(1/2 of $6,000)
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After adjusting the market values, the capital balance of Janice Cowen is $80,000 and the capital balance of Steve Dodd is $40,000. Ellen Chou receives a one-fourth interest in the partnership for a contribution of $30,000. Before admitting Chou, Cowen and Dodd shared net income using a 2:1 ratio.
Paying the New Partner a Bonus
3
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Equity of Cowen $ 80,000Equity of Dodd 40,000Chou’s Contribution 30,000Total equity after admitting Chou $150,000Chou’s equity interest after admission × 25%Chou’s equity after admission $ 37,500Chou’s contribution 30,000Bonus paid to Chou $ 7,500
The bonus is computed as follows:
3
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The entry to record this transaction is as follows:
¹$7,500 × 2/3²$7,500 × 1/3
For a limited liability company, the following entry is required:
3
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Lowman has a capital balance of $45,000 after adjusting assets to fair market value. Conrad contributes $26,000 to receive a 30% interest in a new partnership with Lowman.
Determine the amount and recipient of the partner bonus.
Example Exercise 12-43
Partner Bonus
12-64
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Example Exercise 12-4 (continued) 3
Equity of Lowman $45,000Conrad contribution 26,000Total equity after admitting Conrad $71,000Conrad’s equity interest × 30%Conrad’s equity after admission $21,300
Conrad’s contribution $26,000Conrad’s equity after admission 21,300Bonus paid to Lowman $ 4,700
12-65
For Practice: PE 12-4A, PE 12-4B
Follow My Example 12-4
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Withdrawal of a Partner
If the existing partners purchase the withdrawing partner’s interest, the purchase and sale of the partnership interest is between the parties as individuals.
3
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Death of a Partner
When a partner dies, the partnership accounts should be closed as of the date of death. The net income for the current period should then be determined and divided among the partners’ capital accounts.
3
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Describe and illustrate the accounting for liquidating a partnership.
4
12-68
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When a partnership goes out of business, the winding-up process is called the liquidation of a partnership.
Liquidating Partnerships
4
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Liquidation Process
1. Sell the partnership assets. This step is called realization.
2. Distribute any gains or losses from realization to the partners based upon their income-sharing ratio.
3. Pay the claims of creditors using the cash from step 1 realization.
4. Distribute the remaining cash to the partners based on the balances in their capital accounts.
4
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4
Steps in Liquidating a PartnershipExhibit 4
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Cash $11,000Noncash Assets 64,000Liabilities $ 9,000Jean Farley, Capital 22,000Brad Green, Capital 22,000Alice Hall, Capital 22,000 Total $75,000 $75,000
Liquidation Process
Farley, Green, and Hall share income and losses in a ratio of 5:3:2. On April 9, after discontinuing operations, the firm had the following trial balance.
4
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Between April 10 and April 30, Farley, Green, and Hall sell all noncash assets for $72,000. Thus, a gain of $8,000 ($72,000 – $64,000) is realized.
Gain on Realization
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4
Statement of Partnership Liquidation: Gain on Realization
Exhibit 5
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Sale of assets (Step 1):
4
For a limited liability company, the following entry is required:
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Division of the gain (Step 2):
4
For a limited liability company, the following entry is required:
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Payment of liabilities (Step 3):
4
For a limited liability company, the following entry is required:
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Distribution of cash to partners (Step 4):
4
For a limited liability company, the following entry is required:
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Farley, Green, and Hall sell all noncash assets for $44,000. A loss of $20,000 ($64,000 – $44,000) is realized. The loss is distributed to Farley, Green, and Hall in the income-sharing ratio of 5:3:2.
Loss on Realization
4
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4
Statement of Partnership Liquidation: Loss on Realization
Exhibit 6
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Sale of assets (Step 1):
4
For a limited liability company, the following entry is required:
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Division of the loss (Step 2):
4
Jean Farley, Member Equity 10,000Brad Green, Member Equity 6,000Alice Hall, Member Equity 4,000 Loss on Realization 20,000
For a limited liability company, the following entry is required:
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Payment of liabilities (Step 3):
4
For a limited liability company, the following entry is required:
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Distribution of cash to partners (Step 4):
4
For a limited liability company, the following entry is required:
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Example Exercise 12-54
Liquidating Partnership—Gain
Prior to liquidating their partnership, Todd and Gentry had capital accounts of $50,000 and $100,000, respectively. The partnership assets were sold for $220,000. The partnership had $20,000 of liabilities. Todd and Gentry share income and losses equally. Determine the amount received by Gentry as a final distribution from liquidation of the partnership.
12-85
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Example Exercise 12-5 (continued) 4
Gentry’s equity prior to liquidation $100,000Realization of asset sale $220,000Book value of assets ($50,000
+ $100,000 + $20,000) 170,000Gain on liquidation $50,000Gentry’s share of gain (50% × $50,000)
25,000Gentry’s cash distribution $125,000
12-86
For Practice: PE 12-5A, PE 12-5B
Follow My Example 12-5
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Loss on Realization—Capital Deficiency
Farley, Green, and Hall sell all of the noncash assets for $10,000. A loss of $54,000 ($64,000 – $10,000) is realized. The share of the loss allocated to Farley, $27,000 (50% of $54,000), exceeds the $22,000 balance in her capital account. Farley contributes $5,000 to the partnership.
4
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4Statement of Partnership Liquidation: Loss on Realization—Capital Deficiency
Exhibit 7
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Sale of assets (Step 1):
4
For a limited liability company, the following entry is required:
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Division of the loss (Step 2):
4
For a limited liability company, the following entry is required:
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Payment of liabilities (Step 3):
4
For a limited liability company, the following entry is required:
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Receipt of deficiency (Step 4)
4
For a limited liability company, the following entry is required:
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Distribution of cash to partners (Step 5):
4
For a limited liability company, the following entry is required:
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Partner Does Not Pay Deficiency
If Farley does not pay her deficiency, the deficiency would be allocated to Green and Hall based on their income-sharing ratio of 3:2. The remaining cash would be distributed to Green and Hall as shown below:
Capital Balances Before (Deficiency)
Allocated (Deficiency)
Capital Balance After Deficiency and Cash Distributed to Partners
Farley $ (5,000) $5,000 $ 0Green 5,800 (3,000)* 2,800Hall 11,200 (2,000)** 9,200 Total $12,000 $12,000
*$3,000 = [$5,000 × (3/5)] or ($5,000 × 60%)**$2,000 = [$5,000 × (2/5)] or ($5,000 × 40%)
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Allocation of deficiency:
4
For a limited liability company, the following entry is required:
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Distribution of cash to partners:
4
For a limited liability company, the following entry is required:
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Example Exercise 12-64
Liquidating Partnership—Gain
Prior to liquidating their partnership, Short and Bain had capital accounts of $20,000 and $80,000, respectively. The partnership assets were sold for $40,000. The partnership had no liabilities. Short and Bain share income and losses equally.
a. Determine the amount of Short’s deficiency.
b. Determine the amount distributed to Bain assuming Short is unable to satisfy the deficiency.
12-97
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Example Exercise 12-6 (continued) 4
a. Short’s equity prior to liquidation$ 20,000
Realization of asset sale $ 40,000Book value of assets 100,000Loss on liquidation $ 60,000Short’s share of loss (50% ×
$60,000) 30,000
Short’s deficiency$(10,000)
b. $40,000 $80,000 – $30,000 share of loss – $10,000. Short’s deficiency also equals the amount realized from asset sales.
12-98
For Practice: PE 12-6A, PE 12-6B
Follow My Example 12-6
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Prepare the statement of partnership equity.
5
12-99
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Statement of Partnership Equity
The change in the owners’ capital accounts for a period of time is reported in a statement of partnership equity.
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Statement of Partnership Equity
5
Exhibit 8
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Financial Analysis and Interpretation
Washburn & Lovett, CPAs, had the following information for the last two years:
2011 2010
Revenues $220,000,000 $180,000,000Number of employees 1,600 1,500
Revenue per employee, 2011 =
$220,000,0001,600
= $137,500
Revenue per employee, 2010 = $180,000,000
1,500= $120,000
5
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Financial Analysis and Interpretation
The revenues per employee showed improvement in 2011. Thus, each employee is producing more revenues in 2011, than in 2010, which may indicate improved productivity. Overall, it appears the firm is properly managing the growth in staff.
5
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