Solution Manual For Accounting 26th Edition

Solution Manual for Accounting, 26th Edition
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CHAPTER 12
ACCOUNTING FOR PARTNERSHIPS AND
LIMITED LIABILITY COMPANIES
DISCUSSION QUESTIONS
1. a. Proprietorship: Ease of formation and nontaxable entity.

b. Partnership: Expanded owner expertise and capital, nontaxable entity, and moderate
complexity of formation.
c. Limited liability company: Limited liability to owners, expanded access to capital,
nontaxable entity, and moderate complexity of formation.
2. The disadvantages of a partnership are that its life is limited, each partner has unlimited
liability, one partner can bind the partnership to contracts, and raising large amounts of
capital is more difficult for a partnership than a limited liability company.
3. Yes. A partnership may incur losses in excess of the total investment of all partners. The
division of losses among the partners is made according to their agreement. In addition,
because of the unlimited liability of each partner for partnership debts, a particular partner may
actually lose a greater amount than his or her capital balance.
4. The partnership agreement (partnership) or operating agreement (LLC) establishes the income-
sharing ratio among the partners (members), amounts to be invested, and admission and
withdrawal of partners (members). In addition, for an LLC the operating agreement specifies
if the LLC is owner-managed or manager-managed.
5. No. Maholic would have to bear his share of losses. In the absence of any agreement as to
division of net income or net loss, his share would be one-third. In addition, because of the
unlimited liability of each partner, Maholic may have to bear more than one-third of the losses
if one partner is unable to absorb his share of the losses.
6. Yes. Partnership net income is divided according to the income-sharing ratio, regardless of
the amount of the withdrawals by the partners. Therefore, it is very likely that the partners’
monthly withdrawals from a partnership will not exactly equal their shares of net income.
7. a. Debit the partner’s drawing account and credit Cash.
b. No. Payments to partners and the division of net income are separate. The amount of one
does not affect the amount of the other.
c. Debit the income summary account for the amount of the net income and credit the
partners’ capital accounts for their respective shares of the net income.
8. a. By purchase of an interest, the capital interest of the new partner is obtained from the old
partner, and neither the total assets nor the total equity of the partnership is affected.
b. By investment, both the total assets and the total equity of the partnership are increased.
12-1
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
DISCUSSION QUESTIONS (Continued)

9. It is important to state all partnership assets in terms of current prices at the time of the
admission of a new partner because failure to do so might result in participation by the new
partner in gains or losses attributable to the period prior to admission to the partnership.
To illustrate, assume that A and B share net income and net loss equally and operate a
partnership that owns land recorded at and costing $20,000. C is admitted to the partnership,
and the three partners share in income equally. The day after C is admitted to the partnership,
the land is sold for $35,000 and, because the land was not revalued, C receives a one-third
distribution of the $15,000 gain. In this case, C participates in the gain attributable to the
period prior to admission to the partnership.
10. A new partner who is expected to improve the fortunes (income) of the partnership, through
such things as reputation or skill, might be given equity in excess of the amount invested to
join the partnership.
12-2
PRACTICE EXERCISES
PE 12–1A
Cash 23,000
Accounts Receivable 38,000
Patent 85,000
Accounts Payable 10,000
Allowance for Doubtful Accounts 2,000
Catrina Santana, Capital 134,000
PE 12–1B
Cash 36,000
Inventory 42,000
Land 175,000
Notes Payable 35,000
Austin Fisher, Capital 218,000
PE 12–2A
Distributed to Lee and Andrews:
Lee Andrews Total
Annual salary allowance………………… $32,000 $ 0 $32,000
Interest allowance……………………… 3,200 1 6,000 2 9,200
Total……………………………………… $35,200 $ 6,000 $41,200
Remaining income……………………… 15,200 3 7,600 4 22,800
Net income………….….………………… $50,400 $13,600 $64,000
1
$80,000 × 4%
2
$150,000 × 4%
3
($64,000 – $32,000 – $9,200) × 2/3
4
($64,000 – $32,000 – $9,200) × 1/3
Lee: $50,400
Andrews: $13,600
12-3
PE 12–2B
Distributed to Prado and Nicks:
Prado Nicks Total
Annual salary……………………………………… $10,000 $28,000 $38,000
Interest……………………………………………… 1,000 1 2,500 2 3,500
Total………………………………………………… $11,000 $30,500 $41,500
Deduct excess of allowances over income 5,750 5,750 3 11,500
Net income………………………………………… $ 5,250 $24,750 $30,000
1
$20,000 × 5%
2
$50,000 × 5%
3
($30,000 – $38,000 – $3,500) × 50%
Prado: $5,250
Nicks: $24,750
PE 12–3A
a. Land 70,000
Tony Vale, Capital 35,000
Michael Thorton, Capital 35,000
($150,000 – $80,000) × 50%.
b. Michael Thorton, Capital 31,500

Aasif Safar, Capital 31,500
($28,000 + $35,000) × 50%.
PE 12–3B
a. Equipment 9,000
Kevin Camden, Capital ($39,000 – $30,000) × 2/3. 6,000
Chloe Sayler, Capital 3,000
b. Cash 60,000
Demarco Lee, Capital 60,000
12-4
PE 12–4A
Equity of Bellows…………………………………………………………………… $200,000
Rodriguez’s contribution………………………………………………………… 340,000
Total equity after admitting Rodriguez………………………………………… $540,000
Rodriguez’s equity interest……………………………………………………… × 60%
Rodriguez’s equity after admission…………………………………………… $324,000
Rodriguez’s contribution………………………………………………………… $340,000
Rodriguez’s equity after admission…………………………………………… 324,000
Bonus paid to Bellows…………………………………………………………… $ 16,000
PE 12–4B
Equity of Hiro……………………………………………………………………… $75,000
Marone’s contribution……………………………………………………………… 20,000
Total equity after admitting Marone…………………………………………… $95,000
Marone’s equity interest………………………………………………………...… × 40%
Marone’s equity after admission………………………………………………… $38,000
Marone’s contribution……………………………………………………………… 20,000
Bonus paid to Marone……………………………………………………………… $18,000
PE 12–5A
Parker’s equity prior to liquidation…………………………… $40,000
Realization of asset sales………………………………………… $155,000
Book value of assets (liabilities + owner's equity)
($40,000 + $75,000 + $10,000)………………………………… 125,000
Gain on liquidation………………………………………………… $ 30,000
Parker’s share of gain (50% × $30,000)………………………… 15,000
Parker’s cash distribution……………………………………… $55,000
PE 12–5B
Manning’s equity prior to liquidation………………………… $240,000
Realization of asset sales………………………………………… $410,000
Book value of assets (liabilities + owner's equity)
($240,000 + $150,000 + $80,000)…………………………… 470,000
Loss on liquidation………………………………………………… $ (60,000)
Manning’s share of loss (50% × $60,000)……………………… 30,000
Manning’s cash distribution…………………………………… $210,000
12-5
PE 12–6A
a. Barns’ equity prior to liquidation……………………………… $55,000
Realization of asset sales………………………………………… $ 40,000
Book value of assets*……………………………………………… 160,000
Loss on liquidation………………………………………………… $(120,000)
Barns’ share of loss (50% × –$120,000)………………………… (60,000)
Barns’ deficiency…………………………………………………… $ (5,000)
* $105,000 + $55,000
b. $40,000. ($105,000 – $60,000 share of loss – $5,000 Barns’ deficiency; also equals the
amount realized from asset sales)
PE 12–6B
a. Bonilla’s equity prior to liquidation…………………………… $ 185,000
Realization of asset sales………………………………………… $ 30,000
Book value of assets*……………………………………………… 430,000
Loss on liquidation………………………………………………… $(400,000)
Bonilla’s share of loss (50% × –$400,000)…………………… (200,000)
Bonilla’s deficiency………………………………………………… $ (15,000)
* $185,000 + $245,000
b. $30,000. ($245,000 – $200,000 share of loss – $15,000 Bonilla’s deficiency; also equals
the amount realized from asset sales)
PE 12–7A
$12,375,000
a. 2016: = $165,000 per employee
75 employees
$15,400,000
2017: = $175,000 per employee
88 employees
b. Niles and Cohen, CPAs grew revenues by $3,025,000 ($15,400,000 – $12,375,000), or

24.4% ($3,025,000 ÷ $12,375,000). The number of employees expanded by 13, or 17.3%
(13 ÷ 75). The growth in revenue was more than the growth in the number of
employees; thus, the revenue per employee improved between the two years. The
firm is more efficient in generating revenues from its staff resources between the
two years.
12-6
PE 12–7B
$1,800,000
a. 2016: = $150,000 per employee
12 employees
$1,440,000
2017: = $160,000 per employee
9 employees
b. Eclipse Architects reduced revenues by $360,000 ($1,800,000 – $1,440,000), or 20%

($360,000 ÷ $1,800,000). The number of employees declined by 3, or 25% (3 ÷ 12). The
decline in revenue was less than the decline in the number of employees; thus, the
revenue per employee improved between the two years. The firm is more efficient in
generating revenues from its staff resources between the two years.
12-7
EXERCISES
Ex. 12–1
Cash 24,000
Accounts Receivable* 154,000
Merchandise Inventory 104,300
Equipment 84,500
LaTasha Nabors, Capital 362,000
*$160,000 – $6,000
Ex. 12–2
Cash 75,000
Land 300,000
Equipment 32,700
Melissa Myers, Capital 424,700
12-8
Ex. 12–3
Taylor Albright
a. ………………………………………………………………………………$125,000 $125,000
b. ……………………………………………………………………………… 187,500 62,500
c. ……………………………………………………………………………… 104,900 145,100
d. ……………………………………………………………………………… 120,000 130,000
e. ……………………………………………………………………………… 123,500 126,500
Details: Taylor Albright Total

a. Net income (1:1)……………………………………… $125,000 $125,000 $250,000
b. Net income (3:1)……………………………………… $187,500 $ 62,500 $250,000
c. Interest allowance…………………………………… $ 10,5001 $ 3,500 2 $ 14,000

Remaining income (2:3)……………………………… 94,400 141,600 236,000
Net income……………………………………………… $104,900 $145,100 $250,000
d. Salary allowance……………………………………… $ 30,000 $ 40,000 $ 70,000

Net income……………………………………………… $120,000 $130,000 $250,000
e. Interest allowance…………………………………… $ 10,5001 $ 3,500 2 $ 14,000

Salary allowance……………………………………… 30,000 40,000 70,000
Net income……………………………………………… $123,500 $126,500 $250,000
1
$210,000 × 5%
2
$70,000 × 5%
12-9
Ex. 12–4
Taylor Albright
a. ……………………………………………………………………… $48,000 $48,000
b. ……………………………………………………………………… 72,000 24,000
c. ……………………………………………………………………… 43,300 52,700
d. ……………………………………………………………………… 43,000 53,000
e. ……………………………………………………………………… 46,500 49,500
Details: Taylor Albright Total

a. Net income (1:1)………………………………… $48,000 $48,000 $96,000
b. Net income (3:1)………………………………… $72,000 $24,000 $96,000

2
c. Interest allowance……………………………… $10,5001 $ 3,500 $14,000
Remaining income (2:3)……………………… 32,800 49,200 82,000
Net income……………………………………… $43,300 $52,700 $96,000
d. Salary allowance………………………………… $30,000 $40,000 $70,000

Net income……………………………………… $43,000 $53,000 $96,000
e. Interest allowance……………………………… $10,5001 $ 3,500 2 $14,000

Salary allowance………………………………… 30,000 40,000 70,000
Net income……………………………………… $46,500 $49,500 $96,000
1
$210,000 × 5%
2
$70,000 × 5%
Ex. 12–5
Leigh Luke
Meadows Kowalski Total
Salary allowances…………………………………… $ 35,000 $ 25,000 $ 60,000
Remainder (net loss, $30,000 plus $60,000
salary allowances) divided equally…………… (45,000) (45,000) (90,000)
Net loss……………………………………………… $(10,000) $(20,000) $(30,000)
12-10
Ex. 12–6
a. The partners can divide net income in any ratio that they wish. However, in the
absence of an agreement, net income is divided equally between the partners.
Therefore, Wanda’s conclusion was correct but for the wrong reasons. In addition,
note that the monthly drawings have no impact on the division of income. These
drawings are not the same as a salary allowance, which is part of a formal income-
sharing agreement.
b. An income-sharing agreement could be designed to credit each partner’s capital
account for his or her respective share of income. For example, an income-sharing
agreement could be designed to credit Wanda for interest on her capital contribution,
whereas a salary allowance could be designed to credit Ava for the greater effort she
puts into the partnership. After deducting for these items, the remaining income
could be divided equally.
Ex. 12–7
a. Net income: $148,000
Farley Clark Total
Salary allowance………………… $40,000 $30,000 $ 70,000
Remaining income………………… 46,800 31,200 78,000
Net income………………………… $86,800 $61,200 $148,000
Farley's remaining income: ($148,000 – $70,000) × 3/5

Clark's remaining income: ($148,000 – $70,000) × 2/5
b. (1) Income Summary 148,000

Martin Farley, Member Equity 86,800
Ashley Clark, Member Equity 61,200
(2) Martin Farley, Member Equity 40,000

Ashley Clark, Member Equity 30,000
Martin Farley, Drawing 40,000
Ashley Clark, Drawing 30,000
Note: The reduction in members’ equity from withdrawals would be disclosed on the
statement of members’ equity.
c. If the net income of the LLC were less than the sum of the salary allowances, both
members would still be credited with their salary allowances. From this amount, each
partner would deduct his or her share of the excess of the total salary allowance
over the net income. Thus, the difference between the net income and total salary
allowances would be allocated to each partner as a deduction, according to the
income-sharing ratio.
12-11
Ex. 12–8
a. Observer
WLKT Madison Newspaper,
Partners Sanders LLC Total
Salary allowance……………… $ 55,000 $ 55,000
3
Interest allowance…………… $ 20,000 1 4,000 2 $16,000 40,000
Remaining income (4:3:3)…… 106,000 79,500 79,500 265,000
Net income…………………… $126,000 $138,500 $95,500 $360,000
1
10% × $200,000
2
10% × $40,000
3
10% × $160,000
b. 2016
Dec. 31 Income Summary 360,000
WLKT Partners, Member Equity 126,000
Madison Sanders, Member Equity 138,500
Observer Newspaper, LLC,
Member Equity 95,500
2016
Dec. 31 WLKT Partners, Member Equity 20,000
Madison Sanders, Member Equity* 59,000
Member Equity 16,000
WLKT Partners, Drawing 20,000
Madison Sanders, Drawing 59,000
Drawing 16,000
* $55,000 + $4,000
12-12
Ex. 12–8 (Concluded)

c. MARVEL MEDIA, LLC
Statement of Members’ Equity
For the Year Ended December 31, 2016
Observer
WLKT Madison Newspaper,
Partners Sanders LLC Total
Members’ equity,
January 1, 2016 $200,000 $ 40,000 $160,000 $400,000
Additional investment
during the year 50,000 50,000
$250,000 $ 40,000 $160,000 $450,000
Net income for the year 126,000 138,500 95,500 360,000
$376,000 $178,500 $255,500 $810,000
Withdrawals during
the year 20,000 59,000 16,000 95,000
Members’ equity,
December 31, 2016 $356,000 $119,500 $239,500 $715,000
d. An income-sharing agreement provides flexibility and fairness. Without an

income-sharing agreement, each member would be credited with an equal
proportion of the total earnings, or one-third each. However, the members provide
different capital and effort to the LLC. WLKT is a large contributor of capital
(funds), while Madison Sanders is providing ongoing effort and expertise. These
separate contributions should be acknowledged in the income-sharing formula.
Thus, the agreement credits member equity for both interest on capital and a
salary allowance for Sanders. Any remaining income is credited to capital
according to a negotiated allocation, which in this case is not an equal amount
to each member.
12-13
Ex. 12–9
a. Jan. 31 Partner, Drawing 50,000,000
Cash 50,000,000
b. Dec. 31 Income Summary 740,000,000

Partner, Capital 740,000,000
c. Dec. 31 Partner, Capital* 600,000,000

Partner, Drawing 600,000,000
* 12 months × ₤50 million
d. Partner drawings are not the same as a salary. The drawings represent a distribution
of the profits of the partnership that has been credited to the partners’ capital
accounts. In this case, the drawings occur during the year prior to the final
accounting for profit distribution. Thus, the drawings could end up greater than the
final partner net income. If this were the case, the partner would be liable to the
partnership for returning the excess drawings over the income earned for the year.
Ex. 12–10
a. and b.
Hope Abrams, Capital 60,000
David Cruz, Capital 60,000
$180,000 × 1/3.
Note: The sale to Cruz is not a transaction of the partnership, so the sales price is not
considered in this journal entry.
Ex. 12–11
a. (1) Trent Henry, Capital (20% × $140,000) 28,000

Paul Chavez, Capital (25% × $90,000) 22,500
LeAnne Gilbert, Capital 50,500
(2) Cash 75,000

Jen Faber, Capital 75,000
b. Trent Henry, Capital ($140,000 – $28,000)……………… $112,000

Paul Chavez, Capital ($90,000 – $22,500)……………… 67,500
LeAnne Gilbert……………………………………………… 50,500
Jen Faber……………………………………………………… 75,000
The purchase price paid for each interest by Gilbert is not a partnershp transaction, but
a transaction between partners. Thus, those amounts are not shown in the partnership
accounts.
12-14
Ex. 12–12
a. Cash 30,000
Brad Paulson, Capital 2,500
Drew Webster, Capital 2,500
Austin Neel, Capital 35,000
b. Brad Paulson………………………………………………………… $42,500

Drew Webster………………………………………………………… 57,500
Austin Neel…………………………………………………………… 35,000
c. Tangible assets should be adjusted to current market prices so that the new partner
does not share in any gains or losses from changes in market prices prior to being
admitted. For example, if the market price of land doubled prior to admitting a new
partner, the existing partners should realize the increase in the value of the land in
their capital accounts prior to the new partner’s admission. Otherwise, the new
partner would share in the increase in the market value of the land.
Ex. 12–13
a. Bonus received by Solano:
Cody Jenkins, capital……………………………………………… $ 72,000
Jun Ito, capital……………………………………………………… 38,000
Solano’s contribution……………………………………………… 30,000
Total partners’ capital after admitting Solano………………… $140,000
Solano’s equity interest after admission……………………… × 30%
Valeria Solano, capital……………………………………………… $ 42,000
Solano’s contribution……………………………………………… 30,000
Bonus paid to Solano……………………………………………… $ 12,000
b. Cash 30,000
Cody Jenkins, Capital 6,000
Jun Ito, Capital 6,000
Valeria Solano, Capital 42,000
c. Apparently, Jenkins and Ito value the expertise offered by Solano. Solano is able to
use the computer to design and render landscape designs. It is likely that this type of
skill is very useful for both selling and implementing landscape ideas. Her skills can
help the partnership sell ideas to clients by providing computer renderings of the
designs. In this way, a client can see the design on the computer before agreeing to
work. In addition, the computer-aided landscapes provide materials plans, labor
estimates, and other cost estimates for a particular design. Thus, the partners may
be better able to control their costs by using Solano’s skills. Overall, they value her
skills sufficiently to provide a partner bonus upon her admittance to the partnership.
12-15
Ex. 12–14
a. Medical Equipment 40,000
Abrams, Member Equity* 16,000
Lipscomb, Member Equity** 24,000
* $40,000 × 2/5 = $16,000

** $40,000 × 3/5 = $24,000
b. (1) Cash 228,000

Lin, Member Equity 189,000
* $39,000 × 2/5 = $15,600

** $39,000 × 3/5 = $23,400
Supporting calculations for the bonus:

Abrams, member equity ($154,000 + $16,000)…… $170,000
Lipscomb, member equity ($208,000 + $24,000)… 232,000
Contribution by Lin…………………………………… 228,000
Total equity after admitting Lin……………………… $630,000
Lin’s equity interest after admission……………… × 30%
Lin, member equity…………………………………… $189,000
Contribution by Lin…………………………………… $228,000

Lin’s equity interest after admission……………… 189,000
Bonus paid to Abrams and Lipscomb……………… $ 39,000
(2) Cash 124,000

Lin, Member Equity 131,500
* $7,500 × 2/5 = $3,000
** $7,500 × 3/5 = $4,500

Abrams, member equity……………………………… $170,000
Lipscomb, member equity…………………………… 232,000
Total equity after admitting Lin……………………… $526,000
Lin’s equity interest after admission……………… × 25%
Lin, member equity…………………………………… $131,500
Bonus paid to Lin……………………………………… $ 7,500
12-16
Ex. 12–15
a. L. Bowers, Capital 4,000
V. Lipscomb, Capital 4,000
Equipment 8,000
b. (1) Cash 20,000

L. Bowers, Capital* 4,800
M. Ortiz, Capital 29,600
* $9,600 × 1/2 = $4,800

L. Bowers, capital ($96,000 – $4,000)…………………… $ 92,000
V. Lipscomb, capital ($40,000 – $4,000)……………… 36,000
Contribution by Ortiz……………………………………… 20,000
Total equity after admitting Ortiz………………………… $148,000
Ortiz’s equity interest after admission………………… × 20%
M. Ortiz, capital…………………………………………… $ 29,600
Bonus paid to Ortiz………………………………………… $ 9,600
(2) Cash 60,000

L. Bowers, Capital* 1,800
D. Ortiz, Capital 56,400
* $3,600 × 1/2 = $1,800

L. Bowers, capital………………………………………… $ 92,000
V. Lipscomb, capital……………………………………… 36,000
Total equity after admitting Otiz………………………… $188,000
Ortiz’s equity interest after admission………………… × 30%
D. Ortiz, capital……………………………………………… $ 56,400
Contribution by Ortiz……………………………………… $ 60,000

D. Ortiz, capital……………………………………………… 56,400
Bonus paid to Bowers and Lipscomb $ 3,600
The bonus to Bowers and Lipscomb is credited equally between Bowers’ and
Lipscomb’s capital accounts.
12-17
Ex. 12–16
ANGEL INVESTOR ASSOCIATES
Statement of Partnership Equity
Dennis Ben Randy Total
Overton, Testerman, Campbell, Partnership
Capital Capital Capital Capital
Partnership capital,
January 1, 2016 $180,000 $120,000 $300,000
Admission of Randy Campbell — — $ 75,000 75,000
Salary allowance 40,000 40,000
Remaining income 52,800 35,200 22,000 110,000
Less: Partner withdrawals (46,400)1 (17,600) 2 (11,000)3 (75,000)
Partnership capital,
December 31, 2016 $226,400 $137,600 $ 86,000 $450,000
1
($52,800 + $40,000) ÷ 2
2
$35,200 ÷ 2
3
$22,000 ÷ 2
Admission of Randy Campbell:

Equity of initial partners prior to admission……………………… $300,000
Contribution by Campbell…………………………………………… 75,000
Total……………………………………………………………………… $375,000
Campbell’s equity interest after admission……………………… × 20%
Campbell’s equity after admission………………………………… $ 75,000
Contribution by Campbell…………………………………………… 75,000
Bonus…………………………………………………………………… $ 0
Net income distribution:

The income-sharing ratio is equal to the proportion of the capital balances after admitting
Campbell according to the partnership agreement:
$180,000
Dennis Overton: = 48%
$375,000
$120,000
Ben Testerman: = 32%
$375,000
$75,000
Randy Campbell: = 20%
$375,000
These ratios can be multiplied by the $110,000 remaining income after the salary
allowance to Overton ($150,000 – $40,000). These amounts are credited to the respective
partner capital accounts. For example, Dennis Overton: $52,800 = $110,000 × 48%.
12-18

Withdrawals:
Half of the remaining income is distributed to the three partners. Overton need not take
the salary allowance as a withdrawal but may allow it to accumulate in the member
equity account. He is taking half of the allowance as a withdrawal.
Ex. 12–17
a. Merchandise Inventory 15,500
Justin Marley, Capital* 6,000
Cherrie Ford, Capital** 4,000
LaMarcus Rollns, Capital** 4,000
* ($15,500 – $1,500) × 3/7

** ($15,500 – $1,500) × 2/7
b. Justin Marley, Capital* 146,000

Cash 46,000
* $140,000 + $6,000
Ex. 12–18
a. The income-sharing ratio is determined by dividing the net income for each member
by the total net income. Thus, in 2016, the income-sharing ratio is as follows:
$57,000
Idaho Properties, LLC: = 30%
$190,000
$133,000
Silver Streams, LLC: = 70%
$190,000
Or a 3:7 ratio
12-19

b. Following the same procedure as in (a):
$62,500
Idaho Properties, LLC: = 25%
$250,000
$137,500
Silver Streams, LLC: = 55%
$250,000
$50,000
Thomas Dunn: = 20%
$250,000
c. Thomas Dunn provided a $230,000 cash contribution to the business. The amount
credited to his member equity account is this amount less a $10,000 bonus paid to the
other two members, or $220,000.
d. The positive entries to Idaho Properties and Silver Streams are the
result of a bonus paid by Thomas Dunn.
e. Thomas Dunn acquired a 22% interest in the business on January 1,

2015, computed as follows:
Thomas Dunn, member equity………………………………………… $ 220,000

Idaho Properties, LLC, member equity………………………………… 333,000
Silver Streams, LLC, member equity…………………………………… 447,000
Total………………………………………………………………………… $1,000,000
Thomas’ ownership interest after admission

($220,000 ÷ $1,000,000)………………………………………………… 22%
f. Withdrawals need not be the same as the income credited to the members’ equity
accounts. Withdrawals will be less than the amounts credited when the members
wish to retain capital in the business to support business growth or otherwise
strengthen the business.
12-20
Ex. 12–19
a. Cash balance………………………………………………… $35,000
Sum of capital accounts…………………………………… 46,000
Loss on realization………………………………………… $11,000
Hewitt Patel
Capital balances before realization……………………… $28,000 $18,000
b. Division of loss on realization*…………………………… 5,500 5,500
Balances……………………………………………………… $22,500 $12,500
c. Cash distributed to partners……………………………… 22,500 12,500
Final balances……………………………………………… $ 0 $ 0
* $11,000 ÷ 2
Ex. 12–20
Oliver Ansari Total
Capital balances before realization………… $28,000 $35,000 $63,000
Division of gain on realization
[($67,000 – $63,000) ÷ 2]……………………… 2,000 2,000
Capital balances after realization…………… $30,000 $37,000
Cash distributed to partners………………… 30,000 37,000
Final balances…………………………………… $ 0 $ 0
Ex. 12–21
a. Deficiency
b. $97,500 ($73,500 + $41,000 – $17,000)
c. Cash 17,000
Fowler, Capital 17,000
Support for entry: Lewis Zapata Fowler

Capital balances after realization………… $73,500 $41,000 $(17,000) Dr.
Receipt of partner deficiency…………… 17,000
Capital balances after eliminating
deficiency…………………………………… $73,500 $41,000 $ 0
12-21
Ex. 12–22
a. Cash should be distributed as indicated in the following tabulation:
Bray Lincoln Mapes Total
Capital invested……… $225 $300 $— $ 525
Net income…………… +325 +325 +325 + 975 *
Capital balances and
cash distribution…… $550 $625 $325 $1,500
* $1,500 – $225 – $300
b. Mapes has a capital deficiency of $75, as indicated in the following

tabulation:
Bray Lincoln Mapes Total
Capital invested……… $225 $300 $— $525
Net loss………………… – 75 – 75 –75 –225 *
Capital balances……… $150 $225 $(75) Dr. $300
* $300 – $525
Ex. 12–23
Nettles King Tanaka
Capital balances after realization…… $(15,000) $ 46,000 $71,000
Distribution of partner deficiency…… 15,000 (10,000)* (5,000) **
Capital balances after deficiency
distribution………………………………$ 0 $ 36,000 $66,000
* $15,000 × 2/3
** $15,000 × 1/3
12-22
Ex. 12–24
GOLD, PORTER, AND SIMS
Statement of Partnership Liquidation
For the Period Ending July 1–29, 2016
Noncash Gold Porter Sims
Cash + Assets = Liabilities + (3/6) + (2/6) + (1/6)
Balances before realization $ 56,000 $ 96,000 $32,000 $55,000 $45,000 $20,000
Sale of assets and division of loss +90,000 –96,000 — –3,000 –2,000 –1,000
Balances after realization $146,000 $ 0 $32,000 $52,000 $43,000 $19,000
Payment of liabilities –32,000 — –32,000 — — —
Balances after payment of liabilities $114,000 $ 0 $ 0 $52,000 $43,000 $19,000
Cash distributed to partners –114,000 — — –52,000 –43,000 –19,000
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
12-23
Ex. 12–25
a. ARCADIA SALES, LLC
Statement of LLC Liquidation
For the Period August 1–31, 2016
Member Equity
Noncash Lester Torres Hearst
Balances before realization $ 26,000 $146,000 $35,000 $49,000 $61,000 $27,000
Sale of assets and division of gain +158,000 –146,000 — +4,800 +4,800 +2,400
Cash distributed to members –149,000 — — –53,800 –65,800 –29,400
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
b. Lester, Member Equity 53,800

Torres, Member Equity 65,800
Hearst, Member Equity 29,400
Cash 149,000
c. The income- and loss-sharing ratio is only used to distribute the gain or loss on the realization of asset sales.
It is not used for the final distribution. The final distribution is based upon the credit balances in the member
equity accounts after all gains and losses on realization have been divided and any partner deficiencies have
been paid or allocated.
12-24
Ex. 12–26
a. (1) Income Summary 62,000
Angel Alvarez, Capital 31,000
Emma Allison, Capital 31,000
(2) Angel Alvarez, Capital 32,000

Emma Allison, Capital 39,000
Angel Alvarez, Drawing 32,000
Emma Allison, Drawing 39,000
b.
ALVAREZ AND ALLISON
Angel Emma
Alvarez Allison Total
Capital, January 1, 2016 $47,000 $ 73,000 $120,000
Additional investment during the year 8,000 — 8,000
$55,000 $ 73,000 $128,000
Net income for the year 31,000 31,000 62,000
$86,000 $104,000 $190,000
Withdrawals during the year 32,000 39,000 71,000
Capital, December 31, 2016 $54,000 $ 65,000 $119,000
12-25
Ex. 12–27
$13,100,000,000
a. Revenue per professional staff, current year: = $283,286
46,243
$11,900,000,000
Revenue per professional staff, previous year: = $288,926
41,187
b. The revenues increased between the two years from $11.9 billion to $13.1 billion, or
10.1% [($13.1 – $11.9) ÷ $11.9]. Revenues have increased sharply during this period.
The number of employees has grown even more so, from 41,187 to 46,243, or 12.3%
[(46,243 – 41,187) ÷ 41,187]. As a result, the revenue per professional staff employee
has declined by approximately $5,600, from $288,926 to $283,286. There is a slight
decline in efficiency during this time. It is possible Deloitte and Touche is staffing in
anticpation of revenue growth, as it seems the firm is growing strongly.
Ex. 12–28
$16,200,000
a. Revenue per employee, 2017: = $108,000
150
$18,400,000
Revenue per employee, 2016: = $92,000
200
b. Revenues decreased between the two years; however, the number of employees has
has decreased at a faster rate. Thus, the revenue per employee increased from
$92,000 in 2016 to $108,000 in 2017. This indicates that the efficiency of the firm has
increased in the two years, even though revenues declined. This is likely the result of
the termination of the two contracts. That is, the large decrease in the employment
base is the likely result of the reduction in business. Thus, the business was able to
reduce the workforce faster than the revenue base. This suggests that the contracts
were not very efficient from a revenue per employee perspective and were thus
likely good candidates for termination.
12-26
PROBLEMS
Prob. 12–1A
1. Mar. 1 Cash 21,100
Eric Keene, Capital 77,000
1 Cash 39,600
Equipment 54,900
Abigail McKee, Capital 60,000
2. KEENE AND MCKEE

Balance Sheet
March 1, 2016
Assets
Current assets:
Cash $60,700
Accounts receivable $18,000
Less allowance for doubtful accounts 1,500 16,500
Merchandise inventory 55,900
Total current assets $133,100
Plant assets:
Equipment 54,900
Total assets $188,000
Liabilities
Current liabilities:
Accounts payable $15,000
Notes payable 36,000
Total liabilities $ 51,000
Partners’ Equity
Eric Keene, capital $77,000
Abigail McKee, capital 60,000
Total partners’ equity 137,000
Total liabilities and partners’ equity $188,000
12-27
Prob. 12–1A (Concluded)

3. Feb. 28 Income Summary 90,000
Eric Keene, Capital* 41,900
Abigail McKee, Capital* 48,100
28 Eric Keene, Capital 28,000

Abigail McKee, Capital 30,400
Eric Keene, Drawing 28,000
Abigail McKee, Drawing 30,400
* Computations:
Keene McKee Total
1 2
Interest allowance…………………………… $ 7,700 $ 6,000 $13,700
Salary allowance……………………………… 22,500 30,400 52,900
3 3
Net income……………………………………… $41,900 $48,100 $90,000
1
10% × $77,000
2
10% × $60,000
3
($90,000 – $13,700 – $52,900) × 1/2
12-28
Prob. 12–2A
(1) (2)
$105,000 $180,000
Plan Morrison Amato Morrison Amato
a. ………………………………………$52,500 $52,500 $ 90,000 $ 90,000
b. ……………………………………… 78,750 26,250 135,000 45,000
c. ……………………………………… 35,000 70,000 60,000 120,000
d. ……………………………………… 58,500 46,500 96,000 84,000
e. ……………………………………… 41,500 63,500 79,000 101,000
f. ……………………………………… 40,400 64,600 70,400 109,600
Details:
$105,000 $180,000
Morrison Amato Morrison Amato
a. Net income (1:1)………………… $52,500 $52,500 $ 90,000 $ 90,000
b. Net income (3:1)………………… $78,750 $26,250 $135,000 $ 45,000
c. Net income (1:2)………………… $35,000 $70,000 $ 60,000 $120,000
d. Interest allowance……………… $18,000 $ 6,000 $ 18,000 $ 6,000

Remaining income (1:1)………… 40,500 40,500 78,000 78,000
Net income……………………… $58,500 $46,500 $ 96,000 $ 84,000
e. Interest allowance……………… $18,000 $ 6,000 $ 18,000 $ 6,000
Salary allowance………………… 30,000 64,000 30,000 64,000
Excess of allowances over
income (1:1)……………………… (6,500) (6,500)
Remaining income (1:1)………… 31,000 31,000
Net income……………………… $41,500 $63,500 $ 79,000 $101,000
f. Interest allowance……………… $18,000 $ 6,000 $ 18,000 $ 6,000
Salary allowance………………… 30,000 64,000 30,000 64,000
Bonus allowance………………… 2,200 * 17,200 **
Excess of allowances over
income (1:1)……………………… (7,600) (7,600)
Remaining income (1:1)………… 22,400 22,400
Net income……………………… $40,400 $64,600 $ 70,400 $109,600
* 20% × [$105,000 – ($30,000 + $64,000)]

** 20% × [$180,000 – ($30,000 + $64,000)]
12-29
Prob. 12–3A
1. LAMBERT AND YOST
Income Statement
Professional fees $395,300
Operating expenses:
Salary expense $154,500
Depreciation expense—building 15,700
Property tax expense 12,000
Heating and lighting expense 8,500
Supplies expense 6,000
Depreciation expense—office equipment 5,000
Miscellaneous expense 3,600
Total operating expenses 205,300
Net income $190,000
Tyler Jayla
Lambert Yost Total
Division of net income:
Salary allowance……………………………… $45,000 $54,700 $ 99,700
Interest allowance…………………………… 13,500 * 7,800** 21,300
Remaining income (1:1)…………………… 34,500 34,500 69,000
Net income……………………………………… $93,000 $97,000 $190,000
* $135,000 × 10%
** ($88,000 – $10,000) × 10%
2. LAMBERT AND YOST

Tyler Jayla
Lambert Yost Total
Capital, January 1, 2016 $135,000 $ 78,000 $213,000
Additional investment during
the year — 10,000 10,000
$135,000 $ 88,000 $223,000
$228,000 $185,000 $413,000
Capital, December 31, 2016 $178,000 $125,000 $303,000
12-30

3. LAMBERT AND YOST
Balance Sheet
December 31, 2016
Assets
Current assets:
Cash $ 34,000
Accounts receivable 47,800
Supplies 2,000
Total current assets $ 83,800
Plant assets:
Land $120,000
Building $157,500
Less accumulated depreciation 67,200 90,300
Office equipment $ 63,600
Total plant assets 252,200
Liabilities
Accounts payable $ 27,900
Salaries payable 5,100
Partners’ Equity
Tyler Lambert, capital $178,000
Jayla Yost, capital 125,000
12-31
Prob. 12–4A
1. June 30 Asset Revaluations 2,900
Allowance for Doubtful Accounts 400
[($42,500 – $2,500) × 5%] – $1,600.
30 Merchandise Inventory 4,600

Asset Revaluations 4,600
$76,600 – $72,000.
30 Accumulated Depreciation—Equipment 43,100

Equipment 24,800
$155,700 – $180,500.
30 Asset Revaluations 20,000

Musa Moshref, Capital 10,000
Shaniqua Hollins, Capital 10,000
2. July 1 Shaniqua Hollins, Capital 70,000

Taylor Anderson, Capital 70,000
1 Cash 45,000
Taylor Anderson, Capital 45,000
12-32

3. MOSHREF, HOLLINS, AND ANDERSON
Balance Sheet
July 1, 2016
Assets
Current assets:
1
Cash $ 53,000
Prepaid insurance 3,000
Plant assets:
Equipment 155,700
Liabilities
Partners’ Equity
2
Musa Moshref, capital $130,000
3
Shaniqua Hollins, capital 25,000
Taylor Anderson, capital 115,000
1
$8,000 + $45,000
2
$120,000 + $10,000
3
$85,000 + $10,000 – $70,000
12-33
Prob. 12–5A
1. GERLOFF, CHU, AND JEWETT
For Period February 3–28, 2016
Capital
Noncash Gerloff Chu Jewett
a. Sale of assets and division of loss +34,300 –55,900 — –10,800 –5,400 –5,400
Balances after realization $39,500 $ 0 $15,000 $ 8,500 $ (900) $16,900
b. Payment of liabilities –15,000 — –15,000 — — —
Balances after payment of liabilities $24,500 $ 0 $ 0 $ 8,500 $ (900) $16,900
c. Receipt of deficiency +900 — — — +900 —
Balances $25,400 $ 0 $ 0 $ 8,500 $ 0 $16,900
d. Cash distributed to partners –25,400 — — –8,500 — –16,900
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
2 a. William Gerloff, Capital 600

Courtney Jewett, Capital 300
Joshua Chu, Capital 900
The $900 deficiency of Chu would be divided between the other partners, Gerloff and Jewett, in their income-sharing ratio
(2:1, respectively). Therefore, Gerloff would absorb 2/3 of the $900 deficiency, or $600, and Jewett would absorb 1/3 of the
$900 deficiency, or $300.
b. William Gerloff, Capital* 7,900

Courtney Jewett, Capital** 16,600
Cash 24,500
*$8,500 – $600
**$16,900 – $300
12-34
Prob. 12–6A
1. a. SAILS, WELCH, AND GREENBERG
For Period November 1–30, 2016
Capital
Noncash Sails Welch Greenberg
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
12-35

1. b. SAILS, WELCH, AND GREENBERG
For Period November 1–30, 2016
Capital
Noncash Sails Welch Greenberg
Balances before realization $32,000 $128,000 $20,000 $58,000 $72,000 $10,000
Balances after realization $87,000 $ 0 $20,000 $28,800 $42,800 $ (4,600)
Balances after payment of liabilities $67,000 $ 0 $ 0 $28,800 $42,800 $ (4,600)
Receipt of deficiency +4,600 — — — — +4,600
Balances $71,600 $ 0 $ 0 $28,800 $42,800 $ 0
Cash distributed to partners –71,600 — — –28,800 –42,800 —
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
2. a. Sails, Capital 2,300

Welch, Capital 2,300
Greenberg, Capital 4,600
The $4,600 deficiency of Greenberg would be divided between the other partners, Sails and Welch, in their income-
sharing ratio (1:1, respectively). Therefore, Sails would absorb 1/2 of the $4,600 deficiency, or $2,300, and Welch
would absorb 1/2 of the $4,600 deficiency, or $2,300.
b. Sails, Capital* 26,500

Welch, Capital** 40,500
Cash 67,000
*$28,800 – $2,300
**$42,800 – $2,300
12-36
Prob. 12–1B
1. Apr. 1 Cash 18,000
Whitney Lang, Capital 68,000
1 Cash 26,200
Equipment 63,400
Eli Capri, Capital 120,000
2. LANG AND CAPRI

Balance Sheet
April 1, 2015
Assets
Current assets:
Cash $ 44,200
Plant assets:
Equipment 63,400
Liabilities
Partners’ Equity
Whitney Lang, capital $ 68,000
Eli Capri, capital 120,000
12-37
Prob. 12–1B (Concluded)

3. Mar. 31 Income Summary 118,000
Whitney Lang, Capital* 63,400
Eli Capri, Capital* 54,600
31 Whitney Lang, Capital 40,000

Eli Capri, Capital 30,000
Whitney Lang, Drawing 40,000
Eli Capri, Drawing 30,000
* Computations:
Lang Capri Total
1 2
Interest allowance…………………………… $ 6,800 $ 12,000 $ 18,800
Salary allowance……………………………… 36,000 22,000 58,000
3 3
Remaining income (1:1)…………………… 20,600 20,600 41,200
Net income…………………………………… $63,400 $54,600 $118,000
1
10% × $68,000
2
10% × $120,000
3
($118,000 – $18,800 – $58,000) × 1/2
12-38
Prob. 12–2B
(1) (2)
$420,000 $150,000
Plan Howell Nickles Howell Nickles
a. …………………………………… $210,000 $210,000 $ 75,000 $75,000
b. …………………………………… 168,000 252,000 60,000 90,000
c. …………………………………… 280,000 140,000 100,000 50,000
d. …………………………………… 249,500 170,500 87,500 62,500
e. …………………………………… 218,250 201,750 83,250 66,750
f. …………………………………… 254,550 165,450 92,550 57,450
Details:
$420,000 $150,000
Howell Nickles Howell Nickles
a. Net income (1:1)……………… $210,000 $210,000 $ 75,000 $75,000
b. Net income (2:3)……………… $168,000 $252,000 $ 60,000 $90,000
c. Net income (2:1)……………… $280,000 $140,000 $100,000 $50,000
d. Interest allowance…………… $ 5,000 $ 7,500 $ 5,000 $ 7,500

Remaining income (3:2)……… 244,500 163,000 82,500 55,000
Net income……………………… $249,500 $170,500 $ 87,500 $62,500
e. Interest allowance…………… $ 5,000 $ 7,500 $ 5,000 $ 7,500
Salary allowance……………… 38,000 19,000 38,000 19,000
Net income……………………… $218,250 $201,750 $ 83,250 $66,750
f. Interest allowance…………… $ 5,000 $ 7,500 $ 5,000 $ 7,500

Salary allowance……………… 38,000 19,000 38,000 19,000
Bonus allowance……………… 72,600 * 18,600 **
Net income……………………… $254,550 $165,450 $ 92,550 $57,450
* 20% × [$420,000 – ($38,000 + $19,000)]

** 20% × [$150,000 – ($38,000 + $19,000)]
12-39
Prob. 12–3B
1. RAMIREZ AND XUE
Income Statement
Professional fees $555,300
Operating expenses:
Salary expense $384,900
Depreciation expense—building 12,900
Heating and lighting expense 10,500
Depreciation expense—office equipment 6,300
Property tax expense 3,200
Supplies expense 3,000
Miscellaneous expense 2,500
Total operating expenses 423,300
Net income $132,000
Camila Ping
Ramirez Xue Total
Division of net income:
Salary allowance………………………… $50,000 $65,000 $115,000
Interest allowance……………………… 15,000 * 16,200 ** 31,200
Remaining income (loss) (1:1)………… (7,100) (7,100) (14,200)
Net income…………………………………… $57,900 $74,100 $132,000
* $125,000 × 12%
** ($155,000 – $20,000) × 12%
2. RAMIREZ AND XUE

Camila Ping
Ramirez Xue Total
Capital, January 1, 2016 $125,000 $135,000 $260,000
Additional investment during
the year — 20,000 20,000
$125,000 $155,000 $280,000
$182,900 $229,100 $412,000
Capital, December 31, 2016 $147,900 $179,100 $327,000
12-40

3. RAMIREZ AND XUE
Balance Sheet
December 31, 2016
Assets
Current assets:
Cash $ 70,300
Accounts receivable 33,600
Supplies 5,800
Plant assets:
Land $128,000
Building $175,000
Office equipment $ 42,000
Total plant assets 239,700
Liabilities
Salaries payable 10,000
Partners’ Equity
Camila Ramirez, capital $147,900
Ping Xue, capital 179,100
12-41
Prob. 12–4B
1. Aug. 31 Asset Revaluations 1,800
Allowance for Doubtful Accounts 300
[($19,500 – $1,500) × 5%] – $600.
31 Merchandise Inventory 4,300

$46,800 – $42,500.
31 Accumulated Depreciation—Equipment 15,500

Equipment 3,000
$64,500 – $67,500.
31 Asset Revaluations 15,000

Brian Caldwell, Capital 7,500
Adriana Estrada, Capital 7,500
2. Sept. 1 Adriana Estrada, Capital 26,000

Kris Mays, Capital 26,000
1 Cash 32,000
Kris Mays, Capital 32,000
12-42

3. CALDWELL, ESTRADA, AND MAYS
Balance Sheet
September 1, 2016
Assets
Current assets:
1
Cash $44,300
Less allowance for doubtful accounts 900 17,100
Prepaid insurance 1,200
Plant assets:
Equipment 64,500
Liabilities
Partners’ Equity
2
Brian Caldwell, capital $62,500
3
Adriana Estrada, capital 29,500
Kris Mays, capital 58,000
1
$12,300 + $32,000
2
$55,000 + $7,500
3
$48,000 + $7,500 – $26,000
12-43
Prob. 12–5B
1. FAIRCHILD, LOWES, AND HOWARD
For the Period April 10–30, 2016
Capital
Noncash Fairchild Lowes Howard
Balances before realization $23,500 $84,500 $22,000 $42,000 $ 7,500 $36,500
a. Sale of assets and division of loss +48,500 –84,500 — –9,000 –9,000 –18,000
Balances after realization $72,000 $ 0 $22,000 $33,000 $(1,500) $18,500
b. Payment of liabilities –22,000 — –22,000 — — —
Balances after payment of liabilities $50,000 $ 0 $ 0 $33,000 $(1,500) $18,500
c. Receipt of deficiency +1,500 — — — +1,500 —
Balances $51,500 $ 0 $ 0 $33,000 $ 0 $18,500
d. Cash distributed to partners –51,500 — — –33,000 — –18,500
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
2. a. Zach Fairchild, Capital 500

Amber Howard, Capital 1,000
Austin Lowes, Capital 1,500
The $1,500 deficiency of Lowes would be divided between the other partners, Fairchild and Howard, in their
income-sharing ratio (1:2 respectively). Therefore, Fairchild would absorb 1/3 of the $1,500 deficiency, or $500,
and Howard would absorb 2/3 of the $1,500 deficiency, or $1,000.
b. Zach Fairchild, Capital* 32,500

Amber Howard, Capital** 17,500
Cash 50,000
*$33,000 – $500
**$18,500 – $1,000
12-44
Prob. 12–6B
1. a. CHAPELLE, ROCK, AND PRYOR
For Period August 3–29, 2016
Capital
Noncash Chapelle Rock Pryor
Balances before realization $ 65,000 $167,000 $30,000 $14,000 $102,000 $ 86,000
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
12-45

1. b. CHAPELLE, ROCK, AND PRYOR
For Period August 3–29, 2016
Capital
Noncash Chapelle Rock Pryor
Balances after realization $137,000 $ 0 $30,000 $ (5,000) $ 64,000 $48,000
Balances after payment of liabilities $107,000 $ 0 $ 0 $ (5,000) $ 64,000 $48,000
Receipt of deficiency +5,000 — — +5,000 — —
Balances $112,000 $ 0 $ 0 $ 0 $ 64,000 $48,000
Cash distributed to partners –112,000 — — — –64,000 –48,000
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
2. a. Rock, Capital 2,500

Pryor, Capital 2,500
Chapelle, Capital 5,000
The $5,000 deficiency of Chapelle would be divided between the other partners, Rock and Pryor, in their income-
sharing ratio (1:1, respectively). Therefore, Rock would absorb 1/2 of the $5,000 deficiency, or $2,500, and Pryor would
absorb 1/2 of the $5,000 deficiency, or $2,500.
b. Rock, Capital* 61,500

Pryor, Capital** 45,500
Cash 107,000
*$64,000 – $2,500
**$48,000 – $2,500
12-46
CASES & PROJECTS

CP 12–1
This scenario highlights one of the problems that arises in partnerships:
attempting to align contribution with income division. Often, disagreements
are based on honest differences of opinion. However, in this scenario, there is
evidence that Robbins was acting unethically. Robbins apparently made no
mention of his plans to “scale back” once the partnership was consummated.
As a result, Barrow agreed to an equal division of income based on the
assumption that Robbins’ past efforts would project into the future, while in
fact, Robbins had no intention of this. As a result, Barrow is now providing
more effort, while receiving the same income as Robbins. This is clearly not
sustainable in the long term. Robbins does not appear to be concerned about
this inequity. Thus, the evidence points to some duplicity on Robbins’ part.
Essentially, he knows that he is riding on Barrow’s effort and had planned it
that way.
Barrow could respond to this situation by either withdrawing from the

partnership or changing the partnership agreement. One possible change
would be to provide a partner salary based on the amount of patient billings.
This salary would be highly associated with the amount of revenue brought
into the partnership, thus avoiding disputes associated with unequal
contributions to the firm.
CP 12–2
A good solution to this problem would be to divide income in three steps:
1. Provide interest on each partner’s capital balance.
2. Provide a monthly salary for each partner.
3. Divide the remainder according to a partnership formula.
With this approach, the return on capital and effort will be separately
calculated in the income division formula before applying the percentage
formula. Thus, Willard will receive a large interest distribution based on
the large capital balance, while Hill should receive a large salary distribution
based on the larger service contribution. The return on capital and salary
allowances should be based on prevailing market rates. If both partners are
pleased with their return on capital and effort, then the remaining income
could be divided equally between them.
12-47
CP 12–3
a.
Revenue per
Partner*
Deloitte & Touche………………………………… $4,430,994
PwC………………………………………………… 4,064,681
Ernst & Young……………………………………… 3,280,000
KPMG………………………………………………… 3,241,127
PwC is PricewaterhouseCoopers
* Revenue per partner is determined by dividing the total revenue by the number of
partners for each firm, adjusting the revenues for the fact that they are expressed in
millions in the table. For example, revenue per partner is determined for Deloitte &
Touche as follows:
Deloitte & Touche revenue $13,067,000

= $4,431
per partner: 2,949
b. The amount of revenue earned per partner can be compared across the four firms
by setting each firm’s revenue per partner as a percent of the highest revenue per
partner firm, as follows:
Percent of
Revenue per Deloitte &
Partner Touche
Deloitte & Touche………………………………… $4,430,994 100%
PwC………………………………………………… 4,064,681 92%*
Ernst & Young……………………………………… 3,280,000 74%
KPMG………………………………………………… 3,241,127 73%
* $4,064,681 ÷ $4,430,994
As can be seen, Deloitte & Touche has the highest revenue per partner relative to
the other three firms, while KPMG has the lowest. KPMG’s revenue per partner is 73%
of Deloitte & Touche’s. These data suggest that Deloitte & Touche has a somewhat
smaller partner base supporting its revenues than do the other three firms.
12-48
CP 12–4
When developing an LLC (or partnership), the operating (or partnership)
agreement is a critical part of establishing a business. Each party must consider
the various incentives of each individual in the LLC. For example, in this case,
one party, Lindsey Wilson, is providing all of the funding, while the other two
parties are providing expertise and talent. This type of arrangement can create
some natural conflicts because the interests of an investor might not be exactly
the same as those operating the LLC. Specifically, you would want to advise
Wilson that not all matters should be settled by majority vote. Such a provision
would allow the two noninvesting members to vote as a block to the detriment
of Wilson. For example, the salaries for the two working members could be set
by their vote, so that little profit would be left to be distributed. This would
essentially keep Wilson’s return limited to the 10% preferred return. Wilson
should insist that salary allowances require unanimous approval of all members.
A second issue is the division of partnership income. The suggested agreement

is for all the partners to share the remaining income, after the 10% preferred return,
equally. Wilson should be counseled to consider all aspects of the LLC contribution
to determine if this division is equitable. There are many considerations including
the amount of investment, risk of the venture, degree of expertise of noninvesting
partners, and degree of exclusivity of noninvesting members’ effort contribution
(unique skills or business connections, for example). Often, the simple assumption
of equal division is not appropriate.
In addition, it is sometimes best to require even working members to have an

investment in the LLC, even if it is small, so that they are sensitive to the
perspective of financial loss.
12-49
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DISCUSSION QUESTIONS (Continued)

b. Michael Thorton, Capital 31,500

b. Niles and Cohen, CPAs grew revenues by $3,025,000 ($15,400,000 – $12,375,000), or

b. Eclipse Architects reduced revenues by $360,000 ($1,800,000 – $1,440,000), or 20%

Details: Taylor Albright Total

b. Net income (3:1)……………………………………… $187,500 $ 62,500 $250,000

c. Interest allowance…………………………………… $ 10,5001 $ 3,500 2 $ 14,000

d. Salary allowance……………………………………… $ 30,000 $ 40,000 $ 70,000

e. Interest allowance…………………………………… $ 10,5001 $ 3,500 2 $ 14,000

Details: Taylor Albright Total

b. Net income (3:1)………………………………… $72,000 $24,000 $96,000

d. Salary allowance………………………………… $30,000 $40,000 $70,000

e. Interest allowance……………………………… $10,5001 $ 3,500 2 $14,000

Farley's remaining income: ($148,000 – $70,000) × 3/5

b. (1) Income Summary 148,000

(2) Martin Farley, Member Equity 40,000

Ex. 12–8 (Concluded)

d. An income-sharing agreement provides flexibility and fairness. Without an

b. Dec. 31 Income Summary 740,000,000

c. Dec. 31 Partner, Capital* 600,000,000

* 12 months × ₤50 million

a. (1) Trent Henry, Capital (20% × $140,000) 28,000

(2) Cash 75,000

b. Trent Henry, Capital ($140,000 – $28,000)……………… $112,000

b. Brad Paulson………………………………………………………… $42,500

* $40,000 × 2/5 = $16,000

b. (1) Cash 228,000

* $39,000 × 2/5 = $15,600

Supporting calculations for the bonus:

Contribution by Lin…………………………………… $228,000

(2) Cash 124,000

Supporting calculations for the bonus:

b. (1) Cash 20,000

* $9,600 × 1/2 = $4,800

Supporting calculations for the bonus:

(2) Cash 60,000

Supporting calculations for the bonus:

Contribution by Ortiz……………………………………… $ 60,000

Admission of Randy Campbell:

Net income distribution:

Ex. 12–16 (Concluded)

* ($15,500 – $1,500) × 3/7

b. Justin Marley, Capital* 146,000

Ex. 12–18 (Concluded)

e. Thomas Dunn acquired a 22% interest in the business on January 1,

Thomas Dunn, member equity………………………………………… $ 220,000

Thomas’ ownership interest after admission

Support for entry: Lewis Zapata Fowler

* $1,500 – $225 – $300

b. Mapes has a capital deficiency of $75, as indicated in the following

b. Lester, Member Equity 53,800

(2) Angel Alvarez, Capital 32,000

2. KEENE AND MCKEE

Prob. 12–1A (Concluded)

28 Eric Keene, Capital 28,000

b. Net income (3:1)………………… $78,750 $26,250 $135,000 $ 45,000

c. Net income (1:2)………………… $35,000 $70,000 $ 60,000 $120,000

d. Interest allowance……………… $18,000 $ 6,000 $ 18,000 $ 6,000