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CHAPTER 10
OVERVIEW OF CHAPTER
Chapter 10 is the first of two chapters on the accounting and financial reporting for
partnerships. Chapter 10 discusses the Uniform Partnership Act of 1914 as serving for many
years as the model for defining the rights and responsibilities of the partners to each other and to
the creditors of the partnership. In 1997 the National Conference of Commissioners on Uniform
State Laws (NCCUSL) approved the final model as the Uniform Partnership Act of 1997 (UPA
1997). The chapter also covers the major characteristics of partnerships. Limited Partnerships
(LP), Limited Liability Partnerships (LLP) and Limited Liability Limited Partnerships (LLLP)
are discussed and contrasted.
In this chapter the 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 Partnership. 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 a realignment of partners' capital
balances. The concept of proportionate book value is important when accounting for changes in
membership of the partnership.
Appendix 10A presents tax aspects of partnerships. Appendix 10B briefly discusses joint
ventures.
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LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
SYNOPSIS OF CHAPTER 10
LO2 Understand and explain the differences among different types of partnerships.
LO3 Make calculations and journal entries for the formation of partnerships.
Accounting for the Formation of a Partnership
Illustration of Accounting for Partnership Formation
LO4 Make calculations and journal entries for the operation of partnerships.
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Chapter 10 - Partnerships: Formation, Operation, and Changes in Membership
LO5 Make calculations and journal entries for the allocation of partnership profit or loss.
LO6 Make calculations and journal entries to account for changes in partnership ownership.
Changes in Membership
General Concepts to Account for a Change in Membership in the Partnership
New Partner Purchases an Interest
New Partner Invests in Partnership
Determining a New Partner's Investment Cost
Dissociation of a Partner from the Partnership
We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since
instructors often have different styles and preferences, we have attempted to include slides that
will accommodate different approaches and that can be adapted to classes with different levels of
preparation. For example, some instructors prefer to introduce the material before students have
read the chapter. We have tried to facilitate these types of introductory discussions by including
slides that replicate key points from the chapter. Other instructors expect students to have read
the chapter and attempted homework problems before coming to class. As a result, they may not
find it useful to review all of the topics in the chapter or to include slides that simply review
many of the details they expect students to study before class. However, instructors following
this approach often like to use sample exercises and problems built into the slides that allow
them to have extended discussions or to facilitate group interaction in class.
If instructors elect to spend two class periods on the same subject, they might find a combination
of both styles to be useful by first introducing foundational material before students have read
the chapter and studied the topic, followed by an extended discussion the next class period after
students have read the chapter and attempted homework problems.
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Chapter 10 - Partnerships: Formation, Operation, and Changes in Membership
We have tried to develop slides that can facilitate a flexible approach to allow instructors to
select the slides that best match their objectives and style for class discussions. This is the reason
we are including over 100 slides for some chapters in the text. We do not expect all instructors
to use all slides, but the slide files should help support different teaching approaches and allow
instructors to select the subset of slides that best matches their specific discussion objectives.
The slides are organized by learning objective. We have included a slide at the beginning of
each learning objective to show where the new material begins. Instructors may or may not want
to use these learning objective slides in class. We provide them primarily as a way of organizing
the material. We also include short multiple-choice questions at the end of most learning
objectives. Some instructors find it useful to pause periodically during class to assess students’
level of understanding. For this reason, we include several “practice quiz questions” that can be
used throughout class discussions to engage students, help them focus on key points, or to
facilitate group interaction. Finally, we provide longer exercises and problems that many
instructors find useful in assessing understanding and encouraging group learning.
LO2 Understand and explain the differences among different types of partnerships.
• Slides 13-16 summarize the differences between different types of partnerships.
LO3 Make calculations and journal entries for the formation of partnerships.
• Slides 20-21 introduce the accounting for partnerships.
• Slide 22 presents a basic example of the accounting for the formation of a
partnership.
• Slides 23-29 lead students through a detailed example of the formation of a
partnership through the combination of two other partnerships. While this is a good
example, we often don’t have time to cover it in class. Sometimes we present the
basic fact pattern and ask students to work through this example at home and post a
solution for them later online.
LO4 Make calculations and journal entries for the operation of partnerships.
• Slides 31-32 briefly summarize the accounting for normal partnership operations.
LO5 Make calculations and journal entries for the allocation of partnership profit or loss.
• Slides 36-41 walk students through a detailed example demonstrating the allocation
of partnership profits and losses when there are no restrictions on the application of
the allocation formula.
• Slide 42 explains how the allocation of profits and losses changes when a limit
provision is imposed.
• Slides 43-46 repeat the same example when there is a limit provision.
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Chapter 10 - Partnerships: Formation, Operation, and Changes in Membership
LO6 Make calculations and journal entries to account for changes in partnership ownership.
• Slides 47-55 explain the three methods for accounting for the admission of a new
partner to a partnership.
• Slides 56-60 walk students through a very simple explanation to illustrate the three
methods for accounting for the admission of a new partner.
• Slides 61-67 use the same example to explain the important differences between the
bonus method and the goodwill/revaluation method.
• Slide 68 presents an easy way to calculate implied goodwill at the time of the
admission of a new partner.
• Slides 69-83 present several group exercises to help students understand the
accounting for the admission of a new partner using the bonus and the
goodwill/revaluation methods. We have found over many years that the only way
students can fully understand the accounting for the admission of a new partner is
through repetition and practice. We spend a lot of time working these examples in
class and have found that they are one of the most important tools for helping
students to master this material.
• Slides 84-85 explain important legal aspects of the admission and withdrawal of a
partner.
• Slides 87-89 present a practice quiz question we use to teach students how to account
for the retirement of a partner. The best way to teach this in our opinion is through a
concrete example.
• Slides 90-91comprise a group exercise on the retirement of a partner. It is important
to explain that the repayment of Sandy’s loan is made through a separate cash
payment. The calculations on slide 91 relate only to the entry to record Sandy’s
retirement and the payment related to her capital account. We often give this “group
problem” as a group quiz at the end of class and ask students to work it in small
groups in and turn in their answer as they leave class.
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Chapter 10 - Partnerships: Formation, Operation, and Changes in Membership
TEACHING IDEAS
1. The instructor could invite a partner of a local CPA firm to class to discuss the pros and
cons of the partnership form of doing business. What are the best aspects of a
partnership? What are the worst aspects of a partnership?
2. Select three students from the class to debate the issues of accounting at the time of
dissolution and the investment of a new partner in the partnership for more than the
proportionate book value of the investment. Assign the three alternatives as follows: (a)
recognize goodwill, (b) revalue assets, and (c) use the bonus method. The students must
be able to discuss the positive aspects of the method assigned and be able to provide a
counterpoint to any negative aspects of the specific method. After the debate ends, the
remaining students could then "vote" on the method to be used.
3. The students could be asked to obtain a copy of the Uniform Partnership Act (UPA). A
copy is available in virtually all Business Law I textbooks. Students could be asked a
specific question requiring research in the UPA. For example, students could be asked to
determine the liability of an entering partner for partnership liabilities incurred prior to
the admission date of the new partner. Students will find the answer to this question in
Section 17 of the UPA. This assignment will show the students the necessity of
understanding the UPA before entering or advising on partnerships. In addition, students
will see how the accounting responsibilities for partnerships relate to the legal
requirements of a partnership and its partners.
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Chapter 10 - Partnerships: Formation, Operation, and Changes in Membership
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Chapter 10 - Partnerships: Formation, Operation, and Changes in Membership
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Chapter 10 - Partnerships: Formation, Operation, and Changes in Membership
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Chapter 10 - Partnerships: Formation, Operation, and Changes in Membership
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Chapter 10 - Partnerships: Formation, Operation, and Changes in Membership
OTHER RESOURCES
Chapter 10
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 profit and loss sharing 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 $20,000 and Partner B of $14,000. Partner A receives a
bonus of 10% of net income after deducting the bonus. Interest of 10% is paid on average
capital balances of $70,000 for A and $90,000 for B. Profits for the period are $44,000.
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Chapter 10 - Partnerships: Formation, Operation, and Changes in Membership
Partners A B Total
Profit percentage 60% 40% 100%
** Bonus
B = .10 (NI-B)
B = .10NI-.10B
1.1B = .10NI
1.1B = .10 (44,000)
1.1B = 4,400
B = 4,000
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INSTRUCTOR MANUAL FOR ESSENTIALS OF ADVANCED FINANCIAL ACCOUNTING BAKER, 1ST EDITION
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