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PARTNERSHIPS: FORMATION, OPERATION, AND Ownership Interest
OVERVIEW OF CHAPTER Chapter 15 is the first of two chapters on the accounting and financial reporting for partnerships. Chapter 15 begins with an overview of the legal definition of a partnership as presented in the Uniform Partnership Act of 1914 (UPA). The Revised Uniform Partnership Act of 1994 (RUPA) and the Uniform Partnership Act of 1997 also are briefly discussed. The Limited Liability Partnership (LLP) represents a fairly recent change in partnership law. Partners in a designated LLP limit their potential loss to the amounts in their capital investments. Accounting and law firms frequently operate as LLPs. Accounting for the formation of a partnership is discussed and illustrated. The importance of using fair market values for assets and present values for liabilities is emphasized. Accounting for the operations of a partnership is relatively straightforward. An important point is to differentiate between additional capital contributions and loan agreements. The allocation of the periodic profit or loss to the partners must follow the partnership's Articles of Copartnership. Consistent with the UPA, if no agreement regarding profit and loss has been made, each partner will share equally in any profits or losses. Partnerships enjoy significant flexibility when determining how profits or losses are distributed. A variety of alternatives are fully illustrated in the chapter. Dissolution of the partnership represents a change in the composition of the partners forming the partnership. Admission of new partners creates a source of additional capital. Some partnerships use the admission of a new partner as an opportunity to revalue the net assets or to recognize unrecorded goodwill. Other partnerships may choose the bonus method to account for the admission of a new partner. The bonus method leads to an realignment of partners' capital balances. The concept of proportionate book value share is important when accounting for changes in membership of the partnership. The retirement or withdrawal of a partner also results in a dissolution of the partnership. Some partnerships revalue net assets or recognize unrecorded goodwill at the time of the dissolution. Other partnerships prefer to account for any "premium" paid to the withdrawing partner as a bonus from the other partners. Appendix 15A presents tax aspects of partnerships. Appendix 15B briefly discusses joint ventures.
Instructor’s Manual- Baker/Lembke/King, Advanced Financial Accounting, 6/e 201
PARTNERSHIP FORMATION Contribution of assets and liabilities New entity means new accountability for assets and liabilities contributed by the partners.000 .000 9. Example: Partner A invests in a building with a book value of $10. Do not apply the tax rules for partnerships to financial accounting questions. Assets should be recorded at their FMV and liabilities at their PV.000.000 and a fair value of $16.000 7.000 that is assumed by the Partnership Building (FMV) Mortgage payable A. capital 16. The building has a mortgage payable of $7.
000) (16.000 $ -0- 1.400 B = 4.Baker/Lembke/King.000) 1. Advanced Financial Accounting.000 203 Instructor’s Manual.000) (4.000 (34.000) $19.Partnerships: Formation.000) 10.000 $14.000 7.000.000 and Partner B of $14.000 (4. and Changes in Membership ALLOCATION OF INCOME/LOSS Allocate income/loss before taxes (partnerships don’t pay taxes) follow the partnership agreement with regard to: interest on capital balances salaries to partners bonus to partners residual in p&l ratio (assume equal unless otherwise stated) Example: Partners A and B share profits and losses in ratio of 3:2 Partner A receives a salary of $20.Chapter 15 . Profits for the period are $44.000 for A and $90.000. Operation.10 (44.10NI 1. 6/e .000) (10.000) $25.000 4.10 (NI-B) = .1B = .1B = .000 for B. Partners Profit percentage A 60% B 40% Total 100% Net income Salary Bonus** Interest Residual (Deficit) Allocate in P&L ratio Total ** Bonus B B = .000 9. Interest of 10% is paid on average capital balances of $70.000 $ 44.10NI-.10B (6.000 $20.1B = 4. Partner A receives a bonus of 10% of net income after deducting the bonus.
Which partner(s) receive bonus: A. goodwill or asset revaluation methods Withdrawal of existing partner by asset transfer or sale of interest: Bonus. and Changes in Membership CHANGES IN OWNERSHIP Admission of new partner by asset contribution or purchase of interest directly from present partner: Bonus. When to apply goodwill method (created new capital) NEW PARTNERSHIP > OLD PARTNERS’ CAPITAL + NEW PARTNER’S ASSET INVESTMENT PARTNERS CAPITAL 1. Advanced Financial Accounting.Chapter 15 . additional capital) NEW PARTNERSHIP CAPITAL = CAPITAL OLD PARTNERS’ + NEW PARTNER’S ASSET INVESTMENT 1. or asset revaluation methods A. total resulting capital) new partner’s capital credit = new partner’s asset investment (Goodwill is allocated to old partners in theirP&L ratio) Instructor’s Manual. When to apply bonus method (no created. new partner’s goodwill is recognized (use prior to est. New partner receives bonus new partner’s capital credit > new partner’s asset investment (The difference represents the bonus) B. Operation.Baker/Lembke/King.Partnerships: Formation. old partner’s goodwill is recognized (use new to est. Which partner(s) goodwill is recognized A. total resulting capital) new partner’s capital credit > new partner’s asset investment (The difference represents goodwill) B. goodwill. Old partners receive bonus: new partner’s capital credit < new partner’s asset investment (The difference represents the bonus allocated to partners in their P&L ratio) A. 6/e 205 .
000 Prior capital Capital incr.PARTNERSHIPS: CHANGES IN MEMBERSHIP New partners proportion of the partnership’s book value Prior capital of present partners Investment of new partner Percentage of X capital to new partner = + Differential: Investment cost .000 = $44.000) -0- Cash C Capital *$11.000 x 1/4 11. Investment = proportionate book value .000 (11. from cash 33.invest $11.000 for 1/4 capital interest (previous capital = $33.000) Investment cost Less: Book Value = ($33.000 11.000 + $11.000 .000 * Balance Sheet Prior net assets New cash investment 33.000 11.New partner’s proportion of the partnership’s book value = differential Examples Assume prior partners share profits or losses equally 1.000 11.000) x 1/4 Differential 11.
000 Instructor’s Manual. Operation. Advanced Financial Accounting. 6/e 207 .Baker/Lembke/King.Partnerships: Formation. and Changes in Membership Total Net Assets 44.000 Total Resulting Capital (TRC) 44.Chapter 15 .
000* .000 x 1/4 Goodwill Case: 1/4 TRC TRC Less: Tangible Goodwill = = = 11.asset revaluation.250 = $41.5) C Capital *$10.500 11.2.250 * $11. Investment cost > proportionate book value .250) 750 ( to prior partners.000 x 1/4 11.000 375 375 10.50) B Capital(.C invests $11.000 (41.000) $ 3.000 (10.5) B Capital(.000 1.000 for a 1/4 capital interest (previous capital = $30.000 44.000 + $11. record unrecognized goodwill or assign bonus to prior partners .250 = $41.) Cash A Capital(.500 1.000 3.50) C Capital *$10.000) Bonus Case: Investment cost Less: Book Value = ($30.000 Cash Goodwill A Capital(.000) x 1/4 Differential 11.
Operation. and Changes in Membership Instructor’s Manual. 6/e 209 . Advanced Financial Accounting.Partnerships: Formation.Chapter 15 .Baker/Lembke/King.
000 Total Resulting Capital (TRC) 44.000 30.000 Total Resulting Capital (TRC) 44.000 .000 750 30.000 11.000 3. from cash Capital increase from goodwill Total Net Assets 44.000 10.000 Prior capital Capital incr. from cash Capital increase To prior Total Net Assets 44.000 30.000 Prior capital Capital incr.000 11.250 Balance Sheet (Goodwill case) Prior net assets New cash investment Goodwill 3.000 11.Balance Sheet (Bonus case) Prior net assets New cash investment 33.
Advanced Financial Accounting. recognize goodwill. or assign bonus to new partner .000 = $40.revalue assets.500 = $38.Partnerships: Formation.50) C Capital *$9. Operation.Tangible Goodwill = = = $30.000 FOR A 1/4 capital interest (previous capital = $30.500) ( to new partner) Cash A Capital(.000 + $8.invest $8.000 2.000) Bonus Method: Investment cost Less: Book Value = ($30.Baker/Lembke/King.000 x 1/4 8.000) x 1/4 Differential $ 8.000 (9.50) B Capital(. 6/e 211 .000 10.000 40.000) $ 2.000 x 1/4 8.000* Instructor’s Manual. and Changes in Membership 3.500* Goodwill Method: 3/4 TRC TRC .Chapter 15 .000 750 750 9. Investment cost < proportionate book value .000 Cash Goodwill C Capital *$10.500) (1.000 (38.
000 8.000 Prior capital Capital incr.000 Balance Sheet (Goodwill Method) Prior net assets New cash investment Goodwill 8.000 Soal Latihan Soal 1.500 8.000.000 Prior capital Capital incr.000 30.000 2.Balance Sheet (Bonus Method) Prior net assets New cash investment 8. respectively 3) Any Remaining income or loss is to be divided between Jhon and .000 1.000 30.000 30. The Partnership agreement of Jhon and Pete has the following provision: 1) The partners are to earn 8 percent interest on the average capital 2) Jhon and Pete are to earn salaries of $ 35.000 30. from cash Capital increase from goodwill Total Net Assets 40.000 Total Resulting Capital (TRC) 40. from cash Capital increase From bonus to C Total Net Assets 40.000 and $ 25.000 Total Resulting Capital (TRC) 40.000 2.
000 for a 20 percent interest. and total capital will be $ 600. are: Name Mary Gene Pat 240. the capital balances of Mary. c) Prepare Journal entries for the admissions of Elan if she invests $ 200. Gene. how much must élan invests for a onethird interest? b) Prepare journal enteries for the adminission of Elan if she invests $ 80. and Pete’s is $60.000. 6:3:1. Who share income in the ratio of. Operation. Sisa penghasilan dibagi sama. 6/e 213 . 12.000 for a one-fifth interest.Chapter 15 .000. 60. and goodwill is recorded.000 Required : Prepare an income distribution schedule assuming the income of the partnership is a (a) $ 100.000.000.000 40.000 Soal 3 Pada tanggal 2 Januari 2006 adi dan beri adalah sekutu dengan modal masingmasing Rp.000 dan Rp. Advanced Financial Accounting.000 setahun. Persekutuan memberikan bunga saldo modal awal 10%. Bonus 20% setelah bunga.000 US $ Required: a) if no goodwill or bonus is recorded. 50. and Changes in Membership Pete in a 60:40 ratio 4) Jhon’s average capital is $ 100.Partnerships: Formation. Adi menerima gaji Rp.000 Soal 2 In the GMP partnership.000. and Pat.000 120. Instructor’s Manual.000 and (b) $ 40.Baker/Lembke/King.
Rp. Rp.000 dengan nilai wajar Rp. Rp.000 400. Rp.000 Rp.000.000. Rp.000 80.000 180. Pada tanggal 1 Januari 2006 aset dan ekuitas pada nilai buku dan nilai wajar serta ratio pembagian laba adalah sebagai berikut: Keterangan Kas Piutang netto Persediaan Asset Tetap Rp.000.000.000.000 550.000 tunai dan menyerahkan gedung bernilai buku Rp.000 80. Rp. Hutang Modal Moti (50%) Modal Okar (50%) Rp.000 200. Rp.000. 110.000 untuk digunakan perusahaan .000 150.000.000 150.Diminta: Buat pembagian penghasilan jika penghasilan berwih persekutuan Rp.000. Soal 4 Persekutuan Moti dan Okar didisolusi.000. Rp.000. Rp. 150.000 400. Rp.000 120.000 Tere diterima masuk dengan hak sepertiga dalam persekutuan baru.000.000 tahun 2006. Tere menginvestasikan Rp.000. Nilai Buku 20.000.000 150.000. 120.000.000.000.000 80.000. Rp.000.000 200. Nilai wajar 20. Rp. 140.
and Changes in Membership Diminta: Buatlah neraca pesekutuan per 2 Januari 2006 sesaat setelah Tere masuk jika asumsi: a) Asset dievaluasi dan goodwil diakui b) Asset tidak dievaluasi. 6/e 215 .Chapter 15 .Partnerships: Formation.Baker/Lembke/King. Instructor’s Manual. Advanced Financial Accounting. Operation.
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