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Partnership: is an association of two or more person to carry on as owners of a business for profit.
The main objective of partnership is to getting advantage of capital, managerial skill, and experience
over the computation.
The need for formulating partnership parities are the intension to get advantage over the competitors
operation in the same business (industry) using combined.
CHARACTERISTICS OF PARTNERSHIP
1) LIMITED LIFE-Any change in the ownership (withdrawal, death or add new partner) will result in
dissolution of partnership.
2) UNLIMITED LIABILITIES-At the event of liquidation if the creditors are not satisfied with assets of the
partnership (or if the partnership became insolvent) members will contribute personal asset to pay the
debit of partnership.
TYPES OF PARTNERSHIP
General partnership- all members are liable for contributing personal assets.
Limited partnership- some members will have limited liability but there should at least one
person has unlimited liabilities.
3) ABSENCE OF DOUBLE TAXATION-Members are not expected to pay tax up to the returns (drawing)
obtained from the partnership.
4) MUTUAL AGENCY- The act of one partner binds other members of the partnership.
ADVANTAGE
Relatively easy and inexpensive to organize, requiring only an agreement between two or more
persons.
Able to bring together more capital, more managerial skill &more experience than
solepropritership.
Non taxable entity
DISADVANTAGE
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Prepared by instructor kidist
CHAPTER 5 - PARTNERSHIP FORMULATION, INCOME DIVISION & LIQUIDATION
Example- assume Mr.’x’ and Mr.’y’ agree to form partnership. Each is contributed certain assets and
assume the separate liability amount,
January / cash------------------------------------7,200
Account receivable-----------------16,300
Merchandise inventory-----------28,700
Store equipment---------------------5,400
Office equipment--------------------1,500
Account payable---------------------------------2,600
Division of net income and net loss could be made by considering partner;
Example-assume that the partnership ‘A’ & ‘Z’ organized by initial contribution of $40,000 & $60,000
respectively. In the second year earned a net income of $50,000. Present how the net income will be
distributed & prepare the journal entry.
Assumption 1-the partnership agreement allows that each partner to get 10% of his/her initial capital
contribution and the remaining income will be distributed on the ratio of their capital contribution.
Assumption 2-monthly salary allowance for ‘A’ &’Z’ are $1,200 & $1,800 respectively withdrawal at the
end of the year.
Assumption 3-20% of interest on initial capital investment & salary allowance of $1,200 & $1,800 for ‘A’
& ‘Z’ respectively, drawn at the end of each month.
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CHAPTER 5 - PARTNERSHIP FORMULATION, INCOME DIVISION & LIQUIDATION
PARTNERSHIP DISSOLUTIONS
1) Admission
2) Withdrawal
3) Death
4) Bankruptcy
Example1. Anderson, Bergamin and Carter have a capital balance of $60,000, $50,000 and$ 90,000 in
ABC partnership respectively. On January 2, 2000 Daniel is accepted as partner by purchasing 10% of
Bergamin and 50% of carter’s capital for $17,000 and $60,000 respectively. Record the admission of
Daniel to the partnership.
Example2-assume in the previous example Daniel is admitted by contributing cash of $17,000 and
merchandise inventory valued at $60,000.
REVALUATION OF ASSETS
It is needed if the book value on the date of admission is different from the market value of the assets.
The net amount of increase and decrease will be charged against the capital balance of existing
partners.
Example: In the above example, the following deviations were found in comparing the balance per
partnership books and market fair value. Assume the income sharing ratio is 30%, 25%and 45%. Record
the revaluation and admission of Daniel to the partnership by contributions cash of $17,000 and
merchandise inventory of $60,000. How much was the book value of the capital before admission?
GOOD WILL
Can be determined by considering, respectively shares owned by partners and relative bargaining ability
of parties. It can be attributable to both existing and incoming partners.
Example: Mr’H’ is admitted to the partnership of ‘F’ and ‘G’ having an adjusted capital balance of
$ 40,000 and $45,000 respectively by contributing an inventory of $25,000 value. Both parties (existing
and incoming) agreed the value of the business be $105,000.
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Prepared by instructor kidist
CHAPTER 5 - PARTNERSHIP FORMULATION, INCOME DIVISION & LIQUIDATION
Example: assume that athlete Haile G/selassie wants to join an advertising partnership owned by ‘F’ and
‘G’ by contributing cash of $50,000. Haile claimed the capital balance to $120,000. Finally after a serious
of discussion, they reach a consensus to give Haile a capital balance of $100,000. Record the admission
of Haile to the partnership?
LIQUIDATION OF PARTNERSHIP
Example: the partnership john, Kelly and Larson sharing net income and net loss at a ratio of 25%, 35%
and 40% discontinued their operation (business) and closed their accounts. The following are the
summery of account balances after closing necessary accounts is presented, basied on the three
independent partnership liquidation for the period covering July 1-20
Cash-------------------------------------$8,000
Non-cash assets---------------------$60,000
Liabilities---------------------------------------$16,000
John’s capital---------------------------------$23,000
Kelly’s capital---------------------------------$18,200
Larson’s capital------------------------------$10,800
Show the division of cash and non-cash assets and journalize the entry?
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CHAPTER 5 - PARTNERSHIP FORMULATION, INCOME DIVISION & LIQUIDATION
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Prepared by instructor kidist
CHAPTER 5 - PARTNERSHIP FORMULATION, INCOME DIVISION & LIQUIDATION
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Prepared by instructor kidist