Principles of Accounting Needles 12th Edition Solutions Manual

Principles of Accounting Needles 12th Edition
Solutions Manual
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Principles of Accounting Needles 12th Edition Solutions Manual
CHAPTER 12—Solutions
ACCOUNTING FOR PARTNERSHIPS
Discussion Questions
DQ1. Partnerships are indeed separate entities from the partners from an accounting standpoint,
but because of mutual agency, unlimited liability, and co-ownership of property, the risks
of being a partner are high. This puts a premium on honesty and trust among the partners.
Goodwill among partners is important in making decisions and distributing partnership
income.
DQ2. Accounts receivable should be transferred in at their net realizable value. Thus, the gross
amount of accounts receivable should be recorded, and a related contra account, Allow-
ance for Uncollectible Accounts, should also be recorded so that the net amount is the
amount that the partnership will realize.
DQ3. If the partnership is not very profitable, partners with the large salaries will see reductions
in their respective capital accounts to the extent that the salaries distribution exceed their
distributions for income or loss for the year.
DQ4. The new partner would more likely pay a bonus to the old partners because the value of
the incoming partner’s share of the partnership would be more than the amounts on the
balance sheet. The old partners will want compensation for the value of the proportionate
share the new partner is getting.
DQ5. The partners may decide to divide up the assets among themselves. In this case, they will
have to decide on the value of the assets and who gets which assets. They will also have
to decide how to pay the liabilities, and they will have to settle their capital accounts, just
as they would if cash were involved.
12-1
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Short Exercises
SE1. Partnership Characteristics
1. b 4. c
2. d 5. a
3. e
SE2. Partnership Formation
Cash 24,000
Office Equipment 16,000
Martin, Capital 24,000
Steven, Capital 16,000
To record formation of partnership
SE3. Distribution of Partnership Income
Computation of capital ratios:

Martin $24,000 24 / 40 = 60%
Steven 16,000 16 / 40 = 40%
$40,000
Division of income:
Martin $10,000 × 60% = $6,000
Steven $10,000 × 40% = $4,000
Income of Partner Income

Martin Steven Distributed
Total Income for Distribution $10,000
Distribution of Interest
Martin ( $24,000 × 10% ) $2,400
Steven ( $16,000 × 10% ) $1,600 (4,000)
Remaining Income After Interest $ 6,000
Equal Distribution of Remaining Income
Martin 3,000
Steven 3,000 (6,000)
Remaining Income —
Income of Partners $5,400 $4,600 $10,000
12-2
Income (Loss)
of Partner Income
Martin Steven Distributed
Total Income for Distribution $10,000
Martin ( $24,000 × 10% ) $ 2,400
Steven ( $16,000 × 10% ) $ 1,600 (4,000)
Distribution of Salary: Martin 12,000 (12,000)
Negative Balance After Interest and Salary $ (6,000)
Equal Distribution of Negative Balance
Martin (3,000)
Steven (3,000) 6,000
Income and Loss of Partners $11,400 $(1,400) $10,000
SE6. Withdrawal of a Partner
The Capital account balances would remain the same at $15,000 for Martin and $10,000
for Sania because Sania is buying Steven's interest directly from Steven and not from the
partnership.

Sania, Capital 10,000
To transfer Steven's Capital account
balance to Sania
12-3
SE7. Admission of a New Partner
Partners' equity in the original partnership $50,000

Cash investment by Sania 22,000
Partners' equity in the new partnership $72,000
Sania's equity: $72,000 × 1 / 6 $12,000
Bonus to original partners
Investment by Sania $22,000
Less equity assigned to Sania 12,000 $10,000
Distribution of bonus to original partners
Martin ( $10,000 × 1 / 2 ) $ 5,000
Steven ( $10,000 × 1 / 2 ) 5,000 $10,000
New Capital account balances:

Martin $30,000 + $5,000 = $35,000
Steven $20,000 + $5,000 = $25,000
Sania $12,000
Cash 22,000
Investment by Sania for one-sixth interest in
partnership, bonus distributed to Martin and Steven
SE8. Admission of a New Partner
Partners' equity in the original partnership $25,000

Cash investment by Sania 5,000
Partners' equity in the new partnership $30,000
Sania's equity: $30,000 × 1 / 4 $ 7,500
Bonus to new partner
Equity assigned to Sania $7,500
Less investment by Sania 5,000 $ 2,500
Distribution of bonus from original partners
Martin ( $2,500 × 1 / 2 ) $1,250
Steven ( $2,500 × 1 / 2 ) 1,250 $ 2,500
New Capital account balances:

Martin $15,000 – $1,250 = $13,750
Steven $10,000 – $1,250 = $ 8,750
Sania $7,500
Cash 5,000
Investment by Sania for one-fourth interest in
partnership, bonus from Martin and Steven
12-4
SE9. Withdrawal of a Partner

Cash 18,000
Withdrawal of Sania from partnership
SE10. Liquidation of a Partnership
Loss on office equipment computed:

Carrying Value $13,000
Selling Price 4,000
Loss on Office Equipment $ 9,000
Martin Steven
Distribution of Cash to Partners
Capital Balances $15,000 $10,000
Distribution of Loss
Martin ( $9,000 × 1 / 3 ) (3,000)
Steven ( $9,000 × 2 / 3 ) (6,000)
Cash to Partners $12,000 $ 4,000
SE11. Types of Partnerships
1. b 4. a
2. a 5. d
3. c
12-5
Exercises: Set A
E1A. Partnership Characteristics
1. d
2. a
3. e
4. b
5. c
E2A. Partnership Advantages and Disadvantages
1. a
2. b
3. a
4. b
E3A. Partnership Formation
Cash 80,000
Accounts Receivable 104,000
Supplies 2,000
Equipment 40,000
Allowance for Uncollectible Accounts 8,000
Accounts Payable 64,000
Hanna Hark, Capital 154,000
Original investment by Hanna Hark
Cash 60,000
Supplies 1,000
Equipment 20,000
Allowance for Uncollectible Accounts 6,000
Accounts Payable 18,000
Jamie Rice, Capital 97,000
Original investment by Jamie Rice
12-6
E4A. Distribution of Income
1. Computation: The partners share equally.

Shah ( $240,000 × 1 / 2 ) = $120,000
Ruben ( $240,000 × 1 / 2 ) = 120,000
Total net income $240,000
Note: Because the partnership agreement does not address the distribution of income and
losses, the law requires that income and losses be shared equally.
2. Computation: The partners agreed to share the income three-fifths to Shah and two-fifths
to Ruben.
Shah ( $240,000 × 3 / 5 ) = $144,000
Ruben ( $240,000 × 2 / 5 ) = 96,000
3. Computation: The partners agreed to share the income in the ratio of their original
investments.
Shah ( $240,000 × $400,000 / $1,200,000 ) = $ 80,000
Ruben ( $240,000 × $800,000 / $1,200,000 ) = 160,000
4. Computation: Income of Partner Income

Shah Ruben Distributed
Total Income for Distribution $ 240,000
Shah ( $400,000 × 0.10 ) $ 40,000
Ruben ( $800,000 × 0.10 ) $ 80,000 (120,000)
Shah ( $120,000 × 1 / 2 ) 60,000
Ruben ( $120,000 × 1 / 2 ) 60,000 (120,000)
Income of Partners $100,000 $140,000 $ 240,000
12-7
E5A. Distribution of Income or Losses: Salaries and Interest
1. Computation: Income (Loss)

of Partner Income
Distribution of Salaries
Shah $ 40,000
Ruben $ 48,000 (88,000)
Remaining Income After Salaries $ 152,000
Shah ( $400,000 × 0.06 ) 24,000 (24,000)
Remaining Income After Salaries and Interest $ 128,000
Shah ( $128,000 × 0.50 ) 64,000
Ruben ( $128,000 × 0.50 ) 64,000 (128,000)

of Partner Income
Shah $40,000
Ruben $48,000 (88,000)
Shah ( $400,000 × 0.06 ) 24,000 (24,000)
Negative Balance After Salaries and Interest $(16,000)
Shah ( $16,000 × 0.50 ) (8,000)
Ruben ( $16,000 × 0.50 ) (8,000) 16,000
12-8
E5A. Distribution of Income or Losses: Salaries and Interest (Concluded)

of Partner Loss
Total Loss for Distribution $ (4,000)
Shah $ 40,000
Ruben $ 48,000 (88,000)
Negative Balance After Salaries $ (92,000)
Shah ( $400,000 × 0.06 ) 24,000 (24,000)
Shah ( $116,000 × 0.50 ) (58,000)
Ruben ( $116,000 × 0.50 ) (58,000) 116,000
Remaining Loss —
Income and Loss of Partners $ 6,000 $(10,000) $ (4,000)

of Partner Loss
Shah $ 40,000
Ruben $ 48,000 (88,000)
Negative Balance After Salaries $(168,000)
Shah ( $400,000 × 0.06 ) 24,000 (24,000)
Shah ( $192,000 × 0.50 ) (96,000)
Ruben ( $192,000 × 0.50 ) (96,000) 192,000
Remaining Loss —
Loss of Partners $(32,000) $(48,000) $ (80,000)
12-9
E6A. Distribution of Income: Average Capital Balance
Average capital balances computed:
Capital Months Average

Partner Date Balance × Unchanged = Total Capital
Amine Jan.‒Mar. $320,000 × 3 = $ 960,000
Apr.‒Dec. 256,000 × 9 = 2,304,000
$3,264,000 / 12 = $272,000
Ankit Jan.‒Sept. $480,000 × 9 = $4,320,000

Oct.‒Dec. 360,000 × 3 = 1,080,000
$5,400,000 / 12 = 450,000
Total average capital $722,000
Average capital balance ratios computed:
Amine = $272,000 / $722,000 = 0.377 * = 37.7%

Ankit = $450,000 / $722,000 = 0.623 * = 62.3%
100.0%
*Rounded
Distribution of income computed:
Amine = $320,000 × 0.377 = $120,640

Ankit = $320,000 × 0.623 = 199,360
Total income $320,000
12-10
E7A. Admission of a New Partner: Recording a Bonus
1. Cash 120,000
Gamine, Capital 8,000
Ronald, Capital 8,000
Fenny, Capital 24,000
Amit, Capital 80,000
Admission of Amit to the partnership;
Amit invested $120,000 for a 20 percent interest
Computation:
Original partners' equity $280,000
Amit's investment 120,000
Total equity of new partnership $400,000
Amit's equity ( $400,000 × 0.20 ) $ 80,000
Amit's investment $120,000
Less Amit's equity 80,000
Bonus to the original partners $ 40,000 *
*Distribution of bonus to original partners:

Gamine ( $40,000 × 1 / 5 ) $ 8,000
Ronald ( $40,000 × 1 / 5 ) 8,000
Fenny ( $40,000 × 3 / 5 ) 24,000
Total bonus $40,000
2. Cash 120,000
Gamine, Capital 8,000
Ronald, Capital 8,000
Fenny, Capital 24,000
Amit, Capital 160,000
Admission of Amit to the partnership;
Amit invested $120,000 for a 40 percent
interest
Computation:
Original partners' equity $280,000
Amit's investment 120,000
Total equity of new partnership $400,000
Amit's equity ( $400,000 × 0.40 ) $160,000
Less Amit's investment 120,000
Bonus to Amit $ 40,000 *
*Distribution of bonus from original partners:

Gamine ( $40,000 × 1 / 5 ) $ 8,000
Ronald ( $40,000 × 1 / 5 ) 8,000
Fenny ( $40,000 × 3 / 5 ) 24,000
Total bonus $40,000
12-11
E8A. Withdrawal of a Partner
Tom, Capital 240,000

Sam, Capital 48,000
Richard, Capital 32,000
Cash 320,000
Withdrawal of Tom from the partnership
Computation:
Cash withdrawn by Tom $320,000
Less Tom's capital 240,000
Bonus to Tom $ 80,000 *
*Distribution of bonus from remaining partners:

Sam ( $80,000 × 3 / 5 ) $48,000
Richard ( $80,000 × 2 / 5 ) 32,000
Total bonus $80,000
12-12
E9A. Partnership Liquidation
1. Winner and Perry

Statement of Liquidation
December 31, 2014
Winner, Perry, Gain (or
Other Capital Capital Loss) from
Explanation Cash Assets Liabilities (75%) (25%) Realization
Balance, December 31, 2014 — $ 320,000 $ 20,000 $ 180,000 $ 120,000
Sale of Assets $ 240,000 (320,000) $(80,000)
$ 240,000 — $ 20,000 $ 180,000 $ 120,000 $(80,000)
Payment of Liabilities (20,000) (20,000)
$ 220,000 — $ 180,000 $ 120,000 $(80,000)
Distribution of Gain (or Loss) from Realization (60,000) (20,000) 80,000 *

$ 220,000 $ 120,000 $ 100,000 —
Distribution of Cash to Partners (220,000) (120,000) (100,000)
— — —
* Winner ( $80,000 × 0.75 ) $60,000

Perry ( $80,000 × 0.25 ) 20,000
$80,000
12-13
E9A. Partnership Liquidation (Concluded)
2. Cash 240,000
Gain or Loss from Realization 80,000
Assets 320,000
Sale of assets
Liabilities 20,000
Cash 20,000
Payment of liabilities
Winner, Capital 60,000
Perry, Capital 20,000
Distribution of the loss
Winner, Capital 120,000
Perry, Capital 100,000
Cash 220,000
Distribution of cash to the partners
12-14
E10A. Partnership Liquidation
Abby, Anna, and Anita

July 1, 2014
Abby, Anna, Anita, Gain (or
Other Capital Capital Capital Loss) from
Explanation Cash Assets Liabilities (60%) (20%) (20%) Realization
Balance, July 1, 2014 — $ 960,000 $ 320,000 $ 280,000 $ 80,000 $ 280,000 —
Sale of Assets $ 520,000 (960,000) $(440,000)
$ 520,000 — $ 320,000 $ 280,000 $ 80,000 $ 280,000 $(440,000)
Payment of Liabilities (320,000) (320,000)
$ 200,000 — $ 280,000 $ 80,000 $ 280,000 $(440,000)
Distribution of Gain (or Loss) from Realization (264,000) (88,000) (88,000) 440,000
$ 200,000 $ 16,000 $ (8,000) $ 192,000 —
Distribution of Partners' Share of Anna's Deficit (6,000) 8,000 (2,000)

$ 200,000 $ 10,000 — $ 190,000
Distribution of Cash to Partners (200,000) (10,000) (190,000)

— — —
Each partner will receive cash in the amount of her ending capital balance: $10,000 to Abby and $190,000 to Anita. Anna receives no cash
because her capital balance is zero. To determine the other partners' share of Anna's deficit, you have to calculate new stated ratios. Abby's
new ratio is 75 percent (60 / 80); Anita's is 25 percent (20 / 80). The $8,000 deficit is distributed according to the new ratios: $6,000 ($8,000 ×
0.75) to Abby and $2,000 ($8,000 × 0.25) to Anita.
Note to Instructor: Solutions for Exercises: Set B are provided separately on the Instructor's Resource CD and website.
12-15
Problems
P1. Partnership Formation and Distribution of Income
1. Cash 480,000
Building 440,000
Equipment 280,000
Edi Thomas, Capital 480,000
George Lopez, Capital 720,000
Initial investments of Edi Thomas and
George Lopez
2. a. Income shared equally

2013 2014
Thomas
( $168,000 × 0.50 ) $ 84,000
( $80,000 × 0.50 ) $40,000
Lopez
( $168,000 × 0.50 ) 84,000
( $80,000 × 0.50 ) 40,000
Totals $168,000 $80,000
b. Because the partners failed to agree on an income-sharing arrangement, income must

be shared equally. This answer is identical to (a).
c. Income shared on the basis of the partners' original investments.

2013 2014
Thomas
( $168,000 × 480 / 1,200 ) $ 67,200
( $80,000 × 480 / 1,200 ) $32,000
Lopez
( $168,000 × 720 / 1,200 ) 100,800
( $80,000 × 720 / 1,200 ) 48,000
Totals $168,000 $80,000
12-16
P1. Partnership Formation and Distribution of Income (Continued)
d. Interest on investments; remainder shared equally.

2013 computation:
Thomas Lopez Distributed
Thomas ( $480,000 × 0.10 ) $ 48,000
Lopez ( $720,000 × 0.10 ) $ 72,000 (120,000)
Remaining Income after Interest $ 48,000
Thomas ( $48,000 × 0.50 ) 24,000
Lopez ( $48,000 × 0.50 ) 24,000 (48,000)
Income of Partners $ 72,000 $ 96,000 $ 168,000

2014 computation:
Thomas ( $480,000 × 0.10 ) $ 48,000
Lopez ( $720,000 × 0.10 ) $ 72,000 (120,000)
Negative Balance After Interest $ (40,000)
Thomas ( $40,000 × 0.50 ) (20,000)
Lopez ( $40,000 × 0.50 ) (20,000) 40,000
12-17
P1. Partnership Formation and Distribution of Income (Continued)
e. Salaries allowed; remainder shared equally.

2013 computation:
Thomas $ 80,000
Lopez $ 56,000 (136,000)
Thomas ( $32,000 × 0.50 ) 16,000
Lopez ( $32,000 × 0.50 ) 16,000 (32,000)

2014 computation:
Thomas $ 80,000
Lopez $ 56,000 (136,000)
Thomas ( $56,000 × 0.50 ) (28,000)
Lopez ( $56,000 × 0.50 ) (28,000) 56,000
12-18
P1. Partnership Formation and Distribution of Income (Concluded)
f. Interest and salaries allowed; remainder shared equally.

2013 computation:
Thomas $ 80,000
Lopez $ 56,000 (136,000)
Thomas ( $480,000 × 0.09 ) 43,200
Lopez ( $720,000 × 0.09 ) 64,800 (108,000)
Negative Balance After Salaries and Interest $ (76,000)
Thomas ( $76,000 × 0.50 ) (38,000)
Lopez ( $76,000 × 0.50 ) (38,000) 76,000

2014 computation:
Thomas $ 80,000
Lopez $ 56,000 (136,000)
Thomas ( $480,000 × 0.09 ) 43,200
Lopez ( $720,000 × 0.09 ) 64,800 (108,000)
Thomas ( $164,000 × 0.50 ) (82,000)
Lopez ( $164,000 × 0.50 ) (82,000) 164,000
3. Some factors that should be considered when developing a plan of income sharing among
partners are the talents that each partner brings to the partnership, the relative amounts of
capital that each partner contributes to the partnership, and the amount of time that each
partner devotes to the partnership.
12-19
P2. Distribution of Income: Salaries and Interest
1. Income of Partner Income

Wilkes Chevron Distributed
Distribution of Salary: Wilkes $104,000 (104,000)
Remaining Income After Salary $ 64,000
Chevron ( $500,000 × 0.10 ) $ 50,000 (50,000)
Remaining Income After Salary and Interest $ 14,000
Distribution of Remaining Income
Wilkes ( $14,000 × 2 / 5 ) 5,600
Chevron ( $14,000 × 3 / 5 ) 8,400 (14,000)
Income of Partners $109,600 $ 58,400 $ 168,000

Negative Balance After Salary $ (16,000)
Chevron ( $500,000 × 0.10 ) $ 50,000 (50,000)
Negative Balance After Salary and Interest $ (66,000)
Distribution of Negative Balance
Wilkes ( $66,000 × 2 / 5 ) (26,400)
Chevron ( $66,000 × 3 / 5 ) (39,600) 66,000
3. Income (Loss)
of Partner Loss
Negative Balance After Salary $(129,600)
Chevron ( $500,000 × 0.10 ) $ 50,000 (50,000)
Negative Balance After Salary and Interest $(179,600)
Wilkes ( $179,600 × 2 / 5 ) (71,840)
Chevron ( $179,600 × 3 / 5 ) (107,760) 179,600
Remaining Loss —
Income and Loss of Partners $ 32,160 $ (57,760) $ (25,600)
12-20
P3. Admission and Withdrawal of a Partner
1. a. July 31 Mason, Capital 18,000

Frank, Capital 18,000
Sale of 20 percent of Mason's
capital interest in the partnership
to Frank
$90,000 × 0.20 = $18,000
b. July 31 Cash 40,000

Admission of Frank to the
partnership
c. July 31 Cash 60,000

Mason, Capital 6,000
Jiri, Capital 2,000
James, Capital 4,000
Sale of a 20 percent interest in the
partnership to Frank and the bonus
distributed to the original partners
Computation:
Original partners' capital $180,000
Frank's investment 60,000
Capital of new partnership $240,000
Frank's investment $ 60,000
Frank's interest ( $240,000 × 0.20 ) 48,000

Mason ( $12,000 × 90 / 180 ) $ 6,000
Jiri ( $12,000 × 30 / 180 ) 2,000
James ( $12,000 × 60 / 180 ) 4,000
Total bonus $12,000
Partners' capital ratios:

Capital
Partner Balance Ratios
Mason $ 90,000 90 / 180
Jiri 30,000 30 / 180
James 60,000 60 / 180
$180,000
12-21
P3. Admission and Withdrawal of a Partner (Concluded)
d. July 31 Cash 60,000

Mason, Capital 18,000
Jiri, Capital 6,000
Sale of a 40 percent interest in the
partnership to Frank and the bonus
charged to the original partners
Computation:
Frank's interest ( $240,000 × 0.40 ) $ 96,000
Bonus to Frank $ 36,000*

Mason ( $36,000 × 90 / 180 ) $18,000
Jiri ( $36,000 × 30 / 180 ) 6,000
James ( $36,000 × 60 / 180 ) 12,000
Total bonus $36,000
Partners' capital ratios: See answer to part c.
e. July 31 Mason, Capital 90,000

Jiri, Capital 5,000
Cash 105,000
Withdrawal of Mason from the
partnership*

Jiri ( $15,000 × 30 / 90 ) $ 5,000
James ( $15,000 × 60 / 90 ) 10,000
Total bonus $15,000
f. July 31 Mason, Capital 90,000

Sale of Mason's partnership
interest to Frank
2. The new partner will usually pay a bonus to the old partners if the assets of the partnership
are worth more than the book value of the assets or if the new partner sees a future economic
advantage to being in the partnership. There may be some intangible reasons as well, such
as the desire to join a prestigious firm. The old partners will usually pay a bonus to the new
partner if the new partner will bring skills to the partnership that are badly needed. For exam-
ple, a new investment banking partner might be able to bring new clients to an investment
banking firm.
12-22
P4. Partnership Liquidation
1. Josh, John, and Hassan Partnership

September 1–11, 2014
Josh, John, Hassan, Gain (or
Other Accounts Capital Capital Capital Loss) from
Explanation Cash Assets Payable (40%) (40%) (20%) Realization
Balance, August 31, 2014 $ 280,000 $ 880,000 $ 360,000 $ 400,000 $ 240,000 $ 160,000
a. Sale of Other Assets 720,000 (880,000) $(160,000)
$1,000,000 — $ 360,000 $ 400,000 $ 240,000 $ 160,000 $(160,000)
b. Payment of Liabilities (360,000) (360,000)
$ 640,000 — $ 400,000 $ 240,000 $ 160,000 $(160,000)
c. Distribution of Gain (or Loss) from Realization (64,000) (64,000) (32,000) 160,000
$ 640,000 $ 336,000 $ 176,000 $ 128,000 —
d. Distribution of Cash to Partners (640,000) (336,000) (176,000) (128,000)
— — — —
12-23
P4. Partnership Liquidation (Concluded)
2. a. Sept. 1 Cash 720,000

Other Assets 880,000
Sale of other assets
b. 4 Accounts Payable 360,000
Cash 360,000
Payment of accounts payable
c. 11 Josh, Capital 64,000
John, Capital 64,000
Hassan, Capital 32,000
Distribution of loss from realization
to the partners
Josh:
$160,000 × 0.40 = $ 64,000
John:
$160,000 × 0.40 = 64,000
Hassan:
$160,000 × 0.20 = 32,000
$160,000
d. 11 Josh, Capital 336,000
John, Capital 176,000
Hassan, Capital 128,000
Cash 640,000
Distribution of cash to the partners
Josh:
$400,000 – $64,000 = $336,000
John:
$240,000 – $64,000 = 176,000
Hassan:
$160,000 – $32,000 = 128,000
$640,000
12-24
Alternate Problems
P5. Distribution of Income: Salaries and Interest

Jan Pat Misa Distributed
Total Income for Distribution $1,090,400
Jan ( $1,200,000 × 0.08 ) $ 96,000
Misa ( $1,440,000 × 0.06 ) $ 86,400 (182,400)
Distribution of Salary: Pat $200,000 (200,000)
Remaining Income After Interest and Salary $ 708,000
Distribution of Remaining Income
Jan ( $708,000 × 5 / 10 ) 354,000
Pat ( $708,000 × 3 / 10 ) 212,400
Misa ( $708,000 × 2 / 10 ) 141,600 (708,000)
Income of Partners $450,000 $412,400 $228,000 $1,090,400

Jan ( $1,200,000 × 0.08 ) $ 96,000
Misa ( $1,440,000 × 0.06 ) $ 86,400 (182,400)
Distribution of Salary: Pat $200,000 (200,000)
Negative Balance After Interest and Salary $ (71,200)
Jan ( $71,200 × 5 / 10 ) (35,600)
Pat ( $71,200 × 3 / 10 ) (21,360)
Misa ( $71,200 × 2 / 10 ) (14,240) 71,200
Income of Partners $ 60,400 $178,640 $ 72,160 $ 311,200
12-25
P5. Distribution of Income: Salaries and Interest (Concluded)
3. Income (Loss) of Partner Income

Total Loss for Distribution $(113,600)
Jan ( $1,200,000 × 0.08 ) $ 96,000
Misa ( $1,440,000 × 0.06 ) $ 86,400 (182,400)
Negative Balance After Interest $(296,000)
Distribution of Salary: Pat $ 200,000 (200,000)
Negative Balance After Interest and Salary $(496,000)
Jan ( $496,000 × 5 / 10 ) (248,000)
Pat ( $496,000 × 3 / 10 ) (148,800)
Misa ( $496,000 × 2 / 10 ) (99,200) 496,000
Remaining Loss —
Income and Loss of Partners $(152,000) $ 51,200 $(12,800) $(113,600)
12-26
P6. Admission and Withdrawal of a Partner
1. a. Nov. 30 Sander, Capital 144,000

Rob, Capital 144,000
Admission of Rob by his purchase of
4/5 of Sander's interest
b. Nov. 30 Cash 200,000

Investment of $200,000 by Rob for a
1/3 interest in the partnership; total
partnership capital is now $600,000
c. Nov. 30 Cash 320,000

Sasha, Capital 16,000
Serge, Capital 24,000
Sander, Capital 40,000
1/3 interest in the partnership; bonus
recorded to original partners
Computation:
Rob's investment 320,000
Rob's investment $320,000
Less Rob's interest ( $720,000 × 1 / 3 ) 240,000

Sasha ( $80,000 × 2 / 10 ) $16,000
Serge ( $80,000 × 3 / 10 ) 24,000
Sander ( $80,000 × 5 / 10 ) 40,000
Total bonus $80,000
d. Nov. 30 Cash 164,000

Sasha, Capital 4,800
1/3 interest in the partnership; bonus
recorded to Rob
12-27
P6. Admission and Withdrawal of a Partner (Concluded)
Computation:
Rob's investment 164,000
Rob's interest ( $564,000 × 1 / 3 ) $188,000
Less Rob's investment 164,000
Bonus to Rob $ 24,000 *
*Distribution of bonus from original partners to Rob:

Sasha ( $24,000 × 2 / 10 ) $ 4,800
Serge ( $24,000 × 3 / 10 ) 7,200
Sander ( $24,000 × 5 / 10 ) 12,000
Total bonus $24,000
e. Nov. 30 Sasha, Capital 100,000

Cash 132,000
To record the withdrawal of Sasha
from the partnership*
*Distribution between the remaining partners of excess cash over Sasha's capital
balance:
Serge ( $32,000 × 3 / 8 ) $12,000
Sander ( $32,000 × 5 / 8 ) 20,000
Total $32,000
f. Nov. 30 Sasha, Capital 100,000

Withdrawal of Sasha and admittance
of Rob
2. The new partner will usually pay a bonus to the old partners if the assets of the partnership
are worth more than the book value of the assets or if the new partner sees a future economic
advantage to being in the partnership. There may be some intangible reasons as well, such
as the desire to join a prestigious firm. The old partners will usually pay a bonus to the new
partner if the new partner will bring skills to the partnership that are badly needed. For exam-
ple, a new investment banking partner might be able to bring new clients to an investment
banking firm.
12-28
P7. Partnership Liquidation
1. Leverage Partnership
July 31, 2014
Gauri, Tailor, Pavel, Gain (or
Accounts Equipment Accounts Capital Capital Capital Loss) from
Explanation Cash Receivable Inventory (net) Payable (50%) (30%) (20%) Realization
Balance, 7/31/14 $ 12,000 $ 240,000 $ 528,000 $ 924,000 $ 960,000 $ 144,000 $ 360,000 $ 240,000
a. Sale of Accounts Receivable 144,000 (240,000) $ (96,000)
$ 156,000 — $ 528,000 $ 924,000 $ 960,000 $ 144,000 $ 360,000 $ 240,000 $ (96,000)
b. Sale of Inventory 552,000 (528,000) 24,000
$ 708,000 — $ 924,000 $ 960,000 $ 144,000 $ 360,000 $ 240,000 $ (72,000)
c. Sale of Equipment 600,000 (924,000) (324,000)
$1,308,000 — $ 960,000 $ 144,000 $ 360,000 $ 240,000 $(396,000)
d. Payment of Accounts Payable (960,000) (960,000)
$ 348,000 — $ 144,000 $ 360,000 $ 240,000 $(396,000)
e. Distribution of Gain (or Loss)
from Realization (198,000) (118,800) (79,200) 396,000
$ 348,000 $ (54,000) $ 241,200 $ 160,800 —
f. Distribution of Partners' Share
of Gauri's Deficit* 54,000 (32,400) (21,600)
$ 348,000 — $ 208,800 $ 139,200
g. Distribution of Cash to Tailor
and Pavel (348,000) (208,800) (139,200)
— — —
* Tailor: $54,000 × 3 / 5 = $32,400

Pavel: $54,000 × 2 / 5 = 21,600 $54,000
12-29
P7. Partnership Liquidation (Concluded)
2. a. July 31 Cash 144,000

Sale of accounts receivable
b. 31 Cash 552,000
Inventory 528,000
Sale of inventory
c. 31 Cash 600,000
Equipment, net 924,000
Sale of equipment
d. 31 Accounts Payable 960,000
Cash 960,000
e. 31 Gauri, Capital 198,000
Tailor, Capital 118,800
Pavel, Capital 79,200
Distribution of loss from realization
to the partners
f. 31 Tailor, Capital 32,400
Gauri, Capital 54,000
Transfer of Gauri's deficit capital
balance to the remaining partners
in their new stated ratios
g. 31 Tailor, Capital 208,800
Cash 348,000
Distribution of cash to the
remaining partners
12-30
P8. Comprehensive Partnership Transactions
2013
Feb. 14 Cash 240,000
Land 160,000
Building 960,000
Equipment 320,000
Mortgage Payable 480,000
Zadoney, Capital 800,000
Slater, Capital 400,000
Partners' initial investment
Dec. 31 Income Summary 168,000
Distribution of income for the period
to the partners' Capital accounts

Computation:
Zadoney Slater Distributed
Zadoney $ 80,000
Slater $120,000 (200,000)
Zadoney ( $800,000 × 0.08 ) 64,000
Slater ( $400,000 × 0.08 ) 32,000 (96,000)
Zadoney ( $128,000 × 0.50 ) (64,000)
Slater ( $128,000 × 0.50 ) (64,000) 128,000
12-31
P8. Comprehensive Partnership Transactions (Continued)
2014
Jan. 1 Cash 312,000
Nissan, Capital 420,000
Admission of Nissan to the partnership
and recording of bonus to Nissan
Computation:
Original partners' equity $1,200,000
2013 income 168,000
Total capital, January 1, 2014 $1,368,000
Nissan's investment 312,000
Capital of new partnership $1,680,000
Nissan's interest ( $1,680,000 × 0.25 ) $ 420,000
Less Nissan's investment (312,000)
Bonus to Nissan $ 108,000 *

Zadoney ( $108,000 × 0.50 ) $ 54,000
Slater ( $108,000 × 0.50 ) 54,000
Total bonus $108,000
2014
Dec. 31 Income Summary 174,400
To distribute the income for the year
to the partners' Capital accounts
12-32
Income (Loss) of Partner Income

Computation:
Zadoney Slater Nissan Distributed
Slater $120,000
Nissan $160,000 (280,000)
Negative Balance After Salaries $(105,600)
Zadoney ( $826,000* × 0.08 ) $ 66,080
Slater ( $434,000** × 0.08 ) 34,720
Nissan ( $420,000 × 0.08 ) 33,600 (134,400)
Zadoney ( $240,000 × 1 / 3 ) (80,000)
Slater ( $240,000 × 1 / 3 ) (80,000)
Nissan ( $240,000 × 1 / 3 ) (80,000) 240,000
Income and Loss of Partners $(13,920) $ 74,720 $113,600 $ 174,400
* Zadoney: $800,000 + $80,000 – $54,000 = $826,000

** Slater: $400,000 + $88,000 – $54,000 = $434,000
12-33
2015
Jan. 1 Cash 400,000
Equipment (net) 472,000
Sale of equipment
1 Accounts Payable 176,000
Cash 176,000
1 Zadoney, Capital 24,000
To distribute loss from realization to
the partners
1 Zadoney, Capital 788,080
Mortgage Payable 448,000
Land 160,000
Building (net) 896,000
Cash 180,080
Distribution to Zadoney in liquidation
1 Slater, Capital 484,720
Cash 348,720
Distribution to Slater in liquidation
1 Nissan, Capital 509,600
Cash 509,600
Distribution to Nissan in liquidation
12-34
P8. Comprehensive Partnership Transactions (Concluded)
Zadoney, Slater, and Nissan Partnership

January 1, 2015
Accounts Zadoney, Slater, Nissan, Gain (or
Receivable Building Equipment Accounts Mortgage Capital Capital Capital Loss) from
Explanation Cash (net) Land (net) (net) Payable Payable (33.33%) (33.33%) (33.33%) Realization
Balance 1/1/15 $ 814,400 $ 136,000 $ 160,000 $ 896,000 $ 472,000 $ 176,000 $ 448,000 $ 812,080 * $ 508,720 ** $ 533,600***
Sale of Equipment 400,000 (472,000) $(72,000)
$1,214,400 $ 136,000 $ 160,000 $ 896,000 — $ 176,000 $ 448,000 $ 812,080 $ 508,720 $ 533,600 $(72,000)
Payment of Accounts Payable (176,000) (176,000)
$1,038,400 $ 136,000 $ 160,000 $ 896,000 — $ 448,000 $ 812,080 $ 508,720 $ 533,600 $(72,000)
Distribution of Gain (or Loss) from
Realization (24,000) (24,000) (24,000) 72,000
$1,038,400 $ 136,000 $ 160,000 $ 896,000 $ 448,000 $ 788,080 $ 484,720 $ 509,600 —
Distribution of Assets to Zadoney (180,080) (160,000) (896,000) (448,000) (788,080)
$ 858,320 $ 136,000 — — — — $ 484,720 $ 509,600
Distribution of Assets to Slater (348,720) (136,000) (484,720)
$ 509,600 — — $ 509,600
Distribution of Cash to Nissan (509,600) (509,600)
— —
* Zadoney $826,000 − $13,920 = $812,080

** Slater $434,000 + $74,720 = $508,720
*** Nissan $420,000 + $113,600 = $533,600
12-35
Cases
C1. Conceptual Understanding: Distribution of Partnership Income and Losses
Memorandum
Date: Today's date
To: Partners Landow, Donovan, and Hansa
From: Your Name
Re: Plan for Distributing Profits and Losses
A variety of plans are possible. However, this plan takes into account the capital contributed and
the amount of time put in on partnership activities. The plan has three parts as follows:
1. Allow interest on beginning capital balances at 8 percent to compensate Landow and Donovan
for the financial risk they are taking. After the first year, Landow would receive a distribution
of $8,000, and Donovan would receive $24,000.
2. Allow a base salary of $20,000 to Hansa and $10,000 to Landow to compensate them for the
time they put into the partnership. Using the basic clerk's salary recognizes their time but puts
less strain on the partnership than a higher salary would.
3. Divide any remaining income and losses equally. An equal distribution seems equitable be-
cause each partner is bringing different assets and talents to the partnership. The risks and
time are compensated in 1 and 2 .
When the company is very profitable, the partners will receive nearly equal distributions because
item 3 will be the largest category, but Donovan will always earn the greatest absolute amount
because of having made the largest contribution of capital. If "gain the most" is defined as return
on invested capital, Hansa will always gain the most because Hansa did not put any capital into
the business. If the company loses a large amount of money, Donovan will lose the least because
Donovan will get an interest distribution of $24,000 before losses, which is more than either Lan-
dow or Hansa will receive. Hansa has the most to lose if the company has large losses because
Hansa, who provided no capital to the partnership, will have to use personal assets to cover any
losses allocated to Hansa's Capital account. Of course, if Hansa has no personal assets, then
Hansa's share of the losses will have to be absorbed by Landow and Donovan.
C2. Conceptual Understanding: Partnership Agreement
There is no set solution to this case because each partnership agreement is different. The agree-
ment should be titled "Partnership Agreement," and each provision should have a heading. Usu-
ally one or two sentences will suffice to spell out the details of each provision. The document
should be dated and signed. This case is an excellent group assignment and reinforces the im-
portance of the partnership agreement and the difficulty of taking into account all future events.
12-36
C3. Interpreting Financial Reports: Effects of a Lawsuit on Partnership
1. The lawsuit filed against Springfield Clinic is a contingent liability, and the fact of its existence
and the related malpractice insurance should be disclosed in the notes to the partnership's
financial statements.
2. If Springfield Clinic settles the lawsuit out of court for a payment of $10.1 million, only $100,000
would have to be paid by the partnership. Thus, an entry would be made debiting Loss on Set-
tlement of Lawsuit and crediting Cash for $100,000.
Loss on Settlement of Lawsuit would then be closed to partners' equity and distributed to each
partner's Capital account in accordance with the stated ratios in the partnership agreement. Be-
cause there are ten partners and partners' equity is only $141,000, several partners probably
will show a debit balance in their Capital accounts after the distribution of the loss. The total
remaining partners' equity would be just $41,000 ($141,000 ‒ $100,000).
The personal financial resources of the partner or partners with debit balances would suffer.
Each would be required to pay into the partnership an amount equal to the debit balance of his
or her Capital account because partners have unlimited liability for the liabilities of the partner-
ship. If any partner is unable to make up the debit balance in his or her account, the remaining
partners must make up the difference. All partners, including those with credit capital balances,
ances, will also suffer financial strain because additional contributions of cash to the partner-
ship will be necessary. After payment for the loss of $100,000, only $146,000 in current assets
remain to continue operations. Current liabilities, however, are $180,000.
C4. Conceptual Understanding: International Joint Ventures
Joint ventures provide several advantages for companies entering new markets, particularly emerg-
ing markets like China. First, Nokia gains political sanction by joining forces with the government-
owned company. Second, it gains access to a huge and growing market. Third, it provides a vehicle
to develop ties with local suppliers, which is required by the Chinese government. Fourth, the
amount of capital it provides is limited and if the project fails, its losses are limited.
There are also potential disadvantages to the joint venture form. First, if any member of the ven-
ture does not live up to its commitment, the venture will fail. Second, a clash of cultures can arise.
Many joint ventures have failed because the participants could not work with each other. Third, if
the venture is successful, the profits must be split among the partners, thus reducing the potential
gains for any one partner.
12-37
C5. Ethical Dilemma: Death of a Partner
The case illustrates the problems that arise when partners do not have a definite agreement
about how to distribute the assets on the death of a partner. To determine a fair distribution to
Tyler's estate is difficult because so many factors must be taken into consideration, among them
the following:
1. Tyler's early and later roles in the partnership

2. The partners' current capital balances
3. The effect, if any, of the current value of the assets
4. The partners' net income distribution ratios
Several possible distributions can be supported. One is that Tyler's estate is entitled to his capital
balance in the partnership. In this case, Tyler's estate would receive assets of $1.5 million. This
distribution does not seem entirely fair given that the partnership assets are currently worth much
more than book value.
A more equitable distribution may be to take into consideration that the business is worth more
than book value. Because the current value of the net assets exceeds the book value by $10 mil-
lion, it's easy to argue that Tyler's estate should participate in the increase. This argument is also
supported by the fact that a partnership is dissolved when a partner dies or leaves the partner-
ship. When the partnership is reconstituted by Strong and Hibbert, they would take their propor-
tionate shares of the increase in the assets. The question then becomes, "What ratio should be
used to distribute the increase in value of the net assets?" Arguments can be made for using
either (1) the ratio of the Capital accounts or (2) the ratio of the sharing of net income. If the lat-
ter ratio is deemed fairer, should the present ratio be used or the former one, when Tyler was
more active in the partnership?
Using the ratio of the Capital accounts, Tyler's estate would receive $4 million [$1.5 million +
(0.25 × $10 million)]. Using the ratio of sharing net income when Tyler was active in the partner-
ship would produce a payout of $5.25 million [$1.5 million + (0.375 × $10 million)]. Using the ratio
of sharing net income when Tyler was less active in the partnership would produce a payout of
$2.75 million [$1.5 million + (0.125 × $10 million)].
The range of these alternatives (and there may be others) is from $2.75 million to $5.25 million.
It is difficult to say which is fairest without more information. For example, did the bulk of the
increase in the current value of the net assets occur before or after Tyler's semiretirement? The
attorney's proposed one-third distribution of $5.3 million is close to the high end of the scale and
would seem to imply that most of the increase occurred while Tyler was active in the partnership.
Note to Instructor: This is a good case for small groups and class presentations.
12-38
C6. Conceptual Understanding: Comparison of Career Opportunities in Partnerships
C6. and Corporations
The partnership chapter provides an excellent opportunity to expose students to the possibilities
of a career in public accounting while at the same time exploring the similarities and differences
between partnerships and corporations. All the Big Four accounting firms have informative Inter-
net websites. In many ways, working for a large accounting firm is similar to working for any
other large organization. However, there are general differences that arise from the nature of
the services offered and the nature of the partnership form of business as compared to the cor-
porate form. For example, in the CPA firms, all the partners are "owners" and have a stake in
the business. A student can potentially become a partner and owner after about ten years with
the firm. With a corporation, it is possible to receive stock options after a certain point, but a
manager never truly becomes an owner of the corporation in the sense of sharing the profits of
the company.
12-39
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SE1. Partnership Characteristics

SE2. Partnership Formation

SE3. Distribution of Partnership Income

Computation of capital ratios:

SE4. Distribution of Partnership Income

Income of Partner Income

SE6. Withdrawal of a Partner

Steven, Capital 10,000

Partners' equity in the original partnership $50,000

New Capital account balances:

SE8. Admission of a New Partner

Partners' equity in the original partnership $25,000

New Capital account balances:

Sania, Capital 18,000

SE10. Liquidation of a Partnership

Loss on office equipment computed:

SE11. Types of Partnerships

E1A. Partnership Characteristics

E2A. Partnership Advantages and Disadvantages

E3A. Partnership Formation

1. Computation: The partners share equally.

4. Computation: Income of Partner Income

1. Computation: Income (Loss)

2. Computation: Income (Loss)

3. Computation: Income (Loss)

4. Computation: Income (Loss)

Average capital balances computed:

Capital Months Average

Ankit Jan.‒Sept. $480,000 × 9 = $4,320,000

Average capital balance ratios computed:

Amine = $272,000 / $722,000 = 0.377 * = 37.7%

Distribution of income computed:

Amine = $320,000 × 0.377 = $120,640

*Distribution of bonus to original partners:

*Distribution of bonus from original partners:

Tom, Capital 240,000

*Distribution of bonus from remaining partners:

1. Winner and Perry

Distribution of Gain (or Loss) from Realization (60,000) (20,000) 80,000 *

* Winner ( $80,000 × 0.75 ) $60,000

Abby, Anna, and Anita

Distribution of Partners' Share of Anna's Deficit (6,000) 8,000 (2,000)

Distribution of Cash to Partners (200,000) (10,000) (190,000)

P1. Partnership Formation and Distribution of Income

2. a. Income shared equally

b. Because the partners failed to agree on an income-sharing arrangement, income must

c. Income shared on the basis of the partners' original investments.

d. Interest on investments; remainder shared equally.

Income of Partner Income

e. Salaries allowed; remainder shared equally.

Income of Partner Income

f. Interest and salaries allowed; remainder shared equally.

Income of Partner Income

1. Income of Partner Income

2. Income of Partner Income

1. a. July 31 Mason, Capital 18,000

b. July 31 Cash 40,000

c. July 31 Cash 60,000

*Distribution of bonus to original partners:

Partners' capital ratios: