By: Dr. Mesele K.

Wolaita sodo university Accounting for partnerships

CHAPTER -FIVE

ACCOUNTING FOR PARTNERSHIPS

Introduction

 Business enterprises can be classified in to sole proprietorships,

partnership, corporations, and cooperatives on the basis of ownership. In this unit you
will study how to handle the accounts of the partnership form of business organization.
The accounting for corporate and cooperative form of businesses organization will be
explained in the next Units.

Therefore, the main focus of this Unit is to acquaint you with the basics of accounting
for partnerships. As it will be explained later in this Unit, the same accounting
principles that are used in accounting for a sole proprietorship are applied in partnership
form of businesses. However, there are accounting practices that are unique to
partnerships. These unique accounting features relate to the partners’ capital and
drawing accounts, division of income (or loss), and changes in ownership of the
partnership.

In order to assist you in effectively accomplishing this Unit, it has been classified in to
three sections. The first Section deals with the nature and characteristics of
partnerships. Section two discusses about the formation, operation, income division and
dissolution of partnerships. Finally, Section three tries to cover about liquidation of
partnerships. As usual at the end of each section you will find learning activities and
self check exercise questions.

Definition and Basic characteristics of Partnerships

A partnership is a business organization that is formed by two or more individuals who

agree to carry on as co-owners, a business for profit.

It is customary in the practical world that people get together and form a business
organization to work together. Of course, two heads are better than one. The coalition
can be based on various reasons but the resulting company can be called a partnership.
The characteristics, advantages and disadvantages of this form of business organizations
is covered in this Section. Furthermore the transactions involved in formation of
partnerships is part and parcel of this Section.

A partnership is an association of two or more persons to carry-on as co-owners of a

business for profit. This association is based on a partnership agreement or contract
known as the articles of a partnership/partnership deed.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
The partnership agreement should specify, among many others, the:

 name, location, and purpose of the business;

 capital contribution and duties of each partner;
 methods of income and loss division; and
 rights of each partner upon liquidation (winding up) of a
partnership,

The partnership agreement should be in writing to avoid any misunderstandings about

the formation, operation, and liquidation of a partnership. However, you have to note
that, written agreement is not a requirement for a partnership to exist. Oral or implied
agreement among two or more individuals to carry out business as co-owner results in a
formation of a partnership.

A partnership is like a sole proprietorship in that although it is a separate accounting

entity, it is not a separate legal entity. For purpose of accounting, partnerships are
treated as separate economic entities.

The following are some of the important features of a partnership.

A) Voluntary Association

A partnership is a voluntary association of partners rather than a legal entity in itself.

Therefore, a partner is responsible under the law for his or her partner’s business actions
with in the scope of the partnership. A partner also has unlimited liability for the debts
of the partnership. Because of these potential liabilities, an individual must be allowed
to choose the people who join the partnership.

B) Limited Life

Because a partnership is formed by the consent of two or more partners, it has a limited
life. This means that, anything that ends the contract dissolves the partnership.

A partnership can be dissolved when a new partner is admitted; or an existing partner

withdraws, retires, dies or becomes bankrupt. At this point, the remaining partners
should sign a new contractual agreement to continue the affairs of the business. In
place of the old partnership a new partnership is formed. Thus, a partnership is said to
have a limited life.

C) Unlimited Liability

Each partner is liable for all the debts of the partnership. When and if the partnership
fails to pay its debts, creditors can seize (take) each partner’s personal assets to satisfy
their claims. Therefore, partnership creditors’ claims are not limited to the assets of the
business, but are extended to the personal property of the partners. Each partner, then,
could be required by law to pay all the obligations (debts) of the partnership.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
D) Mutual Agency

Each partner is an agent of the partnership within the scope of the business. This
means that partner’s act to any contract is binding on the remaining partners as long as
it is within the apparent scope of the business’ operations.

E) Co-ownership of Partnership Property

Once invested, the properties contributed by the partners become the property of the
partnership and is owned jointly by all the partners. Upon liquidation of the partnership
and distribution of assets, the partner’s claim on the assets is measured by the amount of
the balance in his/her capital account.

Advantages and Disadvantages of Partnership

A partnership form of business organization has its own advantages and disadvantages.

Advantages of partnership.

A partnership form of business ownership has the following advantages:

1. Easier and less expensive to organize than a corporation since it does not
require to observe as many laws and regulations as that required for a corporation.
2. Possible to raise a large amount of capital and managerial skill (talent) than a
sole proprietorship. Because a partnership is formed by two or more persons, it is
possible to raise a large amount of capital and managerial skill than a single owner.
3. Partnership is not subject to double taxation as a case in a corporation because
each partner reports his/her own share of partnership income and is individually taxed.

Disadvantages of partnership

Partnership has the following disadvantages:

1. Partners assume unlimited liability. The liability of the partners is snot limited
to what they have contributed in the partnership, but it goes to the extent of their
personal properties (assets).
2. Disadvantageous if each partner does not exercise his/her good judgment
because one partner’s act can bind a partnership into a contract (mutual agency).
3. The life of a partnership is always limited by death, bankruptcy, or any thing
that causes changes in partnership personnel. Automatically it legally ends a partnership
and a new partnership agreement is required.

1.2 Recording Investments in partnership ( Formation of a Partnership )

Accounting for a partnership is not different from the accounting for a single
proprietorship, except for transactions that affect the partners’ equities. Upon formation

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
of a partnership form of business organizations, a separate capital account is maintained
for each partner in a partnership. Through out the life of the partnership, as long as the
partner remains as co-owner, the capital account of each partner is affected separately.
Each partner’s capital account is credited for the value of their investment upon
formation of the partnership.

Since ownership rights in a partnership are divided between two or more partners, there
must be:

 A capital account for each partner

 A drawing account for each partner
 A careful measurement and division of earnings, and
 Care in accounting for admission of new partner and withdrawal of an existing
partner.

When partnership is formed, partners may contribute assets in different forms. These
assets are valued at their current fair values instead of their book values available in the
records of the entities before contributions. Moreover, liabilities may also be transferred
to the partnership.

Ilustration

On January,1,2006, Ato Chala and Ato Degu decided to form a partnership business,
which would provide accounting services. They have been in business separately before
they form the partnership. The partnership assumed the liabilities of their separate
business. The assets were valued and recorded at their current fair market value.

Shown below are the assets contributed and the liabilities assumed by
the partnership at their fair market value.
Ato Chala Ato Degu
Cash Birr 6,500 Cash Birr 3,300
Accounts 8,600 Accounts 4,300
Receivable Receivable
Supplies 21,000 Supplies 12,000
Equipment 3,000 Building 150,000
Accounts (2,300) Accounts (3,200)
Payable Payable

The journal entry on January 1, 2006 to record the investment of each partner and the
formation of the partnership would be:

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
Jan. 1. Cash 6,500

Account Recievable 8,600

Supplies 21,000

Equipment 3,000

Account payable 2,300

Chala’s Capital 36,800

, Jan. 1. Cash 3,300

A/R 4,300

Supplies 12,000

Building 150,000

Accounts Payable 3,200

Degu’s capital 166,400

Dividing earnings of Partnerships

 Once partnerships have started their intended business operation, generation

of profits or incurrence of a loss is inevitable. Since all partners are co-owners they will
have a share in that profit or loss. The treatment of these items will be the essence of
this Section. Furthermore due to various reasons, there will be a change in identify of
partners. This results in the end of the life of the former partnership and formation of a
new one. This operation is called dissolution. The detail causes for and treatment of
dissolution is also covered under this Section.

A partnership’s income and losses can be distributed according to whatever method the
partners specify in the partnership agreement. The agreement should be specific and
clear to avoid later disputes.

If a partnership agreement does not state any condition about the distribution of income
and losses, the law requires that they be shared equally by all partners. Also, if a
partnership agreement specifies only the distribution of income, but is silent as to
losses, the law requires that losses be distributed in the same ratio as income.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships

Income can be shared among the partners in one of the following three ways:

1) On a stated ratio assigned to each partner.

2) Ratio of partners’ capital investment
3) Salary and interest allowance and the reminder in a fixed ratio.

Example

The following illustration indicates independent assumption of distributing income and

loss of the partnership.

Assume that Ato Chala, and Ato Degu, partnership had a net income of Br. 60,000

A. Assume that the articles of a partnership provides equal share of Net Income or
Loss.

- In this case the capital accounts of each partner will be credited for Birr30,000

Income Summary ------------------------------------ 60,000

Ato Chala’s Capital ------------------------------------- 30,000

Ato Degu’s Capital ------------------------------------- 30,000

A. Net income is divided in ratio of 3:2 to Ato Chala and Ato Degu respectively.

Income summary ---------------------------- 60,000

Ato Chala’s capital (3/5 X 60,000) --------------- 36,000

Ato Degu’s capital (2/5 X 60,000) ----------------24,000

B. Net income is divided in a ratio of partners’ capital account balance at the

beginning of the fiscal period.

The sum of the two partners’ capital on the date of formation was: 36,800+166,400 =
203,200

Income summary ----------------------------------- 60,000

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
D. Net income is divided by allowing 5% interest on their beginning capital balances,
and also a salary of Birr 5,000 was allowed to Ato Chala and the remainder is divided
equally.

Net Income Division

Income is distributed in the following way

Dr. Ato Tota Distribu
Chala Degu l ted
Net Birr
income 60,000
Interest 1,840* 8,320* 10,160 49,840*
(5%) *
Salary 5,000 --- 5,000 44,840
Remain 22,420 22,420 44,840 --0--
der *** ***
Distribu 29,260 30,740 60,000
tion

 *5% of Ato Chala’s beginning capital would be 5%* 36,800 = 1,840

 *5% of Ato Degu’s beginning capital would be 5%*166,400 = 8,320
 **distributable income after interest expense is 60,000 – 10,160 = 49,840
 ***The remaining 44,840 birr would be distributed equally among the two
partners as 22,420.

Journal entry

Income summary --------------------------------- 60,000

Ato Chala capital ---------------------------------- 29,260

Ato Degu capital -----------------------------------30,740

1.3 Financial Statements for a partnership

In many respects the financial statements of a partnership are like that of a sole
proprietorship. At the end of the period a statement of partners’ capital is prepared which
summarizes the effect of transaction on the capital account balance of each partner. The
statement of owners’ equity for Ato Chala and Ato Degu using assumed data and the
income division shown above is illustrated below.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships

Chala and Degu

Statement of partners’ Capital

For the year Ended Dec., 31, 2006

Ato Ato Degu

Chala
Capital Bal. January 1, Br.
2002 36,800
Add: Additional 4,200 4,300
investment
Total Br.41,000 Br.170,700
Net income distribution 29,260 30,740
Deduct: Withdrawals 5,000 5,000
during the year
Capital Bal. Dec. 31, 2002 Br.65260 Br.
196,440

NB – The balance sheet of a partnership is different from that of a sole proprietorship

only in the owner’s equity section. In the partnership business since two or more
persons owns the business, there are two or more capital accounts whereas for a sole
proprietorship there will always be one capital account.

1.4 Accounting for Dissolution of a Partnership

One of the basic characteristics of a partnership business is its limited life. Any change
in the personnel of the membership result in the dissolution of the partnership.
Dissolution of a partnership occurs whenever there is change in the original association
of partners. When a partnership is dissolved, the partners lose their authority to
continue the business as a going concern. This does not mean that the business
operation necessarily is ended or interrupted, but it does mean – from a legal and
accounting standpoint – that the separate entity stops to exist.

 The remaining partners can act for the partnership in finishing the
affairs of the business or in forming a new partnership that will be a new accounting
entity.
 A partnership is legally dissolved (terminated) when a new partner is
admitted or an existing partner withdraws.

Thus, dissolution is caused by admission and or withdrawal of partner(s).

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
Admission of a New Partner

The admission of a new partner dissolves the old partnership because a new association
has been formed. Dissolving the old partnership and creating a new one require the
consent of all the old partners and the ratification of a new partnership agreement.

When a new partner is admitted, a new partnership agreement should be prepared.

 A new partner can be admitted into a partnership in one of two ways:

1. By purchasing ownership right from one or more of the original partners, or

2. By investing assets in the partnership.

1. Admission by Purchase of Ownership Right

When a new partner purchases an interest from the existing partner(s), it is considered
as a personal transaction between the selling partner(s) and the new partner, and the
latter’s account will be credited to the extent of the existing partner’s interest sold.

When an individual is admitted to a firm by purchasing ownership right from an old

partner, each partner must agree to the change. A journal entry is needed in the
partnership to transfer the ownership right purchased from the capital account of the
selling partner to the capital account of the new partner. The partnership’s assets and
liabilities remain unchanged.

Suppose, for example, Ato Hagos joins the partnership of Ato Chala and Ato Degu by
buying ownership right of Br. 8,000 from Ato Degu. The entry to record the admission
of Ato Hagos; and the transfer of the ownership right from the capital account of Ato
Degu to the capital account of Ato Hagos in the partnership book is shown below.

Journal entry

Ato Degu’s capital ----------------------------- 8,000

Ato Hagos’s capital --------------------------------- 8,000

The price that Ato Hagos paid to Ato Degu can be more or less than Br. 8,000 but that
is irrelevant as it wouldn’t be reflected in the record (books) of the partnership. The
money was personally paid to Ato Degu, not to the partnership.

2. Admission by Investing Assets

Assume that instead of purchasing ownership right from the existing partners, Ato
Hagos invested cash of Br. 80,000 into the partnership. In this case both partnership
assets and total owners’ equity will increase. The journal entry must record such an
investment and the increase in partnership assets.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
Consider the following scenarios as an example:

A. Ato Hagos receives a 50% ownership right in the partnership. Assume also
that Ato Chala’s and Ato Degu’s capital balance were Br. 25,000 and Br. 55,000
respectively. Ato Chala and Ato Degu share income in a ratio of 2:1 respectively.

Journal Entry

Ato Hagos’s capital account would be credited for Br. 80,000 i.e., (55,000 + 25,000 +
80,000) X ½

Cash ------------------------------------------ 80,000

Ato Hagos, Capital ------------------------80,000

B. Ato Hagos receives a one-fourth ownership right upon admission. Assume

everything else as above.

In this case Ato Hagos’s capital account would be credited for birr 40,000 i.e., (Birr
25,000+55,000+80,000)x1/4.

The difference Br. 40,000, (80,000 – 40,000) would be shared between the remaining
two partners with the income-sharing ratio. This is because despite the 80,000 birr
invested Ato Hagos agreed to receive only 40,000. The difference 40,000 called
goodwill of old partners or goodwill of the partnership and it is shared according to
their income sharing plan, i.e., 2:1.

Journal entry

Cash --------------------- 80,000

Hagos capital ----------- 40,000

Ato Chala capital -------26,667

Ato Degu capital ------- 13,333

Retirement or Withdrawal of a Partner

When an existing partner withdraws, he/she can sell his/her ownership right or he/she
can withdraw assets from the partnership. Both options are considered below.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
i. Sale of Ownership Right to the Existing Partner

When ownership right is sold by a withdrawing partner to an existing partner, the entry
on the partnership’s books transfers the retiring partner’s capital balance to the buyer’s
capital account.

Example:

Ato Degu withdraws from the partnership because of a disagreement. He sells his Br.
38,333 ownership right to Ato Chala.

Journal entry

Ato Degu Capital --------------------------------38,333

Ato Chala Capital ------------------------------- 38,333

The amount paid by Ato Chala is not recorded on the partnership books, because the
transaction involves no flow of assets to or from the partnership.

i. Withdrawal of Assets From the Partnership

When a partner withdraws, he/she may be paid above or below the amount shown in
his/her capital balances.

Example:

A. Assume Ato Degu was paid Br. 56,000 cash when he withdraws from the
partnership. The capital balances of each partner were as follows as on that date:

Ato Chala capital -------------------- Br. 100,000

Ato Degu capital --------------------- 50,000

Ato Hagos capital ------------------- 35,000

Total Equities Birr 185,000

Journal entry

Ato Degu capital -------------------------50,000

Ato Hagos capital ------------------------1,500

Ato Chala capital -------------------------4,500

Cash --------------------------------------------56,000

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
 The Birr 6,000 excess is shared on the basis of a 3:1 ratio, i.e., Ato Chala would be
charged for 6,000x¾ = Birr 4,500, and Ato Hagos would be charged for Birr 6,000x¼=
Birr 1,500.

Liquidation of a Partnership

It is obvious that business organizations are usually formed, stay in operation and then
possibly die, means, go out of business. This section tries to cover topics related to the
termination of business operation of partnership form of business organizations.

What possible factors could lead partnerships to end their operation and go out of
business?

Liquidation of a partnership is the process of ending the business, of selling enough

assets to pay the partnership’s liabilities and distributing any remaining assets among
the partners. Liquidation is a special form of dissolution. When a partnership is
liquidated, the business will not continue.

A partnership may be liquidated for a number of reasons. Some common reasons for
liquidation include:

 The objectives sought in forming the partnership has been achieved;

 The time period for which the partnership was found expires (end);
 Newly enacted laws have made the partnerships activities illegal; and or
 The partnership becomes bankrupt.

The partnership agreement should indicate the procedure to be followed incase of

liquidation. Liquidation may be effected immediately or over an extended period. If
liquidation is immediate, a single cash distribution may be made to the partners after all
non-cash assets are sold and the liabilities are paid.

The sale of the assets at the time of liquidation of a partnership is known as realization.
As the assets of the business are sold, any gain or loss should be distributed to the
partners according to the income and loss sharing ratio.

As cash is realized, it must be paid first to outside creditors. Finally, the remaining cash
is distributed to the partners in accordance with the balance of their capital accounts.

Liquidation involves three major activities

 Selling of non-cash assets.

 Payment of liabilities
 Distribution of remaining assets to the partners.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
Illustration

The partnership of Roben, Sisay, and Tamirat is liquidated on September 1, 2006. The
income and loss sharing ratio of the partners is: Roben 40%, Sisay 35%, and Tamirat
25%. After discontinuing the ordinary business operations of their partnership and
closing the accounts, the following summary of a trial balance is prepared:

R, S and T

Trial Balance

September 1, 2006

Debit Credit
Cash 10,000
Other assets 90,000
Liabilities 10,000
R. Capital 30,000
S. Capital 30,000
T. Capital ---------- 30,000
Total 100,000 100,000

Based on the information on the trial balance, accounting for liquidation of R, S, and T
partnership will be illustrated using different selling prices for the non-cash assets.

Case One: Gain on Realization

Assume that Roben, Sisay, and Tamirat sell all non cash assets for Birr95, 000, realizing
a gain of birr 5,000, (Birr 95,000 – Birr 90,000). The gain is divided among R, S and T
in the income and loss sharing ratio of 40%, 35%, and 25% respectively. Then, the
liabilities are paid, and the remaining cash is distributed to the partners according to the
balance in their capital accounts.

The entries to record the steps in the liquidation of a business are as follows:

1) Cash ------------------------------------------ 95,000

Other assets ------------------------------------90,000

Gain on sale of assets ------------------------- 5,000

(Entry to record the sale of non cash assets and the recognition of gain on
realization)

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
2) Gain on sale of assets -------------------5,000

R Cap. (5,000 X 40%) --------------------2,000

S. Cap. (5,000 X 35%) --------------------1,750

T. Cap. (5,000 X 25%) ------------------- 1,250

(To distribute gain on realization)

3) Liabilities …………………….. 10,000

Cash …………………………… 10,000

(To record the settlement of partnership liabilities))

After the above entries are posted, the partners’ capital accounts shows:

R’s Beginning Balance. 30,000 + 2,000 = Birr 32,000

S’s Beginning Balance 30,000 + 1,750 = Birr 31,750

T’s Beginning Balance 30,000 + 1,250 = Birr 31,250

The cash account now shows a balance of Birr 95,000 (10,000 + 95,000 – 10,000).

The entry recorded upon distribution of this cash among the partners would, therefore,
be:

R, capital …………………………. Birr 32,000

S, capital ………….…………….. Birr 31,750

T, capital ……………………….. Birr 31,250

Cash …………………………………….. 95,000

(To record the distribution of cash among the partners)

Case two: Loss on Realization but No capital Deficiencies

Assume that R, S, and T sell all non-cash assets for Birr 70,000, instead of Birr 95,000,
incurred a loss of birr 20,000 (Birr 90,000 – Birr 70,000)

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
Journal entry

1) Cash ……………………………… 70,000

Loss on realization …………..……..20,000

Other Assets …………………………….90, 000

(To record the sale of the assets)

2) R capital (40% X 20,000) ………….8, 000

S capital (35,000 X 20,000) ………..7,000

T capital (25% X 20,000) …………..5,000

Loss on Realization ……………………..20,000

(To distribute the loss of realization)

3) Liabilities ……………………………..10,000

Cash ………………………………. 10,000

(To record the settlement of partnership liabilities)

After the above entries have been posted; the accounts show cash Birr 70,000: R capital
Birr 22,000; S capital Birr 23,000 and T, capital Birr 25,000. The entry to record the
cash distribution to the partners would be as follows:

4) R, cap …………………………. 22,000

S ,cap …………………………...23,000

T, cap……………………………25,000

Cash …………………………………70,000

(Entry to record the distribution of cash to partners)

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
Case three: Loss on Realization with Deficiency in one Partner Capital

Assume the non-cash assets of R, S and T partnership are sold for only Birr 10,200,
incurring a loss of Birr79, 800, (Birr90, 000 – Birr 10,200). The entries to record the
division of loss among the partners and the liquidation to this point are shown below:

1) Cash ……………………………….. 10,200

Loss on sale of Assets ……………... 79,800

Other Assets ……………………………90,000

(To record the sale of assets)

2) R capital (79800 X 40%) ……………………. 31,920

S capital (79800 X 35%) …………………….. 27,930

T capital (79800 X 25%) …………………….. 19,950

Loss on sale of Assets ……………………………79,800

(To distribute loss on realization)

3) Liabilities …………………………….10,000

Cash ………………………………………..10,000

(To record settlement of liabilities)

At this stage of liquidation, the capital accounts of the partners have the following
balances.

R capital = 30,000 – 31920 = (1,920)

S capital = 30,000 – 27930 = 2,070

T capital = 30,000 – 19950 = 10,050

Only birr 10,200 cash is available (10,000 + 10200 – 10,000) for distribution to S and T
while the combined balances of their capital accounts is Birr 12,120. Therefore,
additional Birr 1, 920 (12120 – 10,200) is needed which is the amount owed by R to the
partnership. This amount is called deficiency of capital. And partner “R” is called a
deficient partner. This deficiency is the claim of the partnership over the partner R.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
Therefore, either R will have to pay this amount first and the cash will be distributed to
S and T, or S and T will have to share the Birr 1920 loss in their income and loss-
sharing ration of 35:25.

Let’s assume, the loss was distributed since R couldn’t pay the amount immediately.

Journal Entries

S capital (35/60 X 1920) …………… 1,120.00

T capital (25/60 X 1920) …………… 800.00

R capital ………………………………… 1,920

(To charge R’s capital deficiency to S and T)

S, capital ……………………….. 950.00

T, capital ……………………….. 9,250.00

Cash ………………………………….10, 200

(To record the final cash distribution to partners)

exercise questions (assignment 3)

Multiple choice items

1. Which of the following is not a characteristic of a partnership?

A. Taxable entity
B. Co-ownership of property
C. Mutual agency
D. Limited life

2. A partnership agreement should include each of the following except:

A. Names and capital contributions of partners.
B. Rights and duties of partners as well as basis for sharing net income or loss.
C. Basis for splitting partnership income taxes.
D. Provision for withdrawal of assets.

3. The advantages of a partnership do not include:

A. Ease of formation.
B. Unlimited liability.
C. Freedom from government regulation.
D. Ease of decision making.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
4. Upon formation of a partnership, each partner’s initial investment of assets should be recorded
at their:
A. Book values.
B. Cost.
C. Market values.
D. Appraised values.

5. Biniam and Sami formed a partnership. Biniam contributed $8,000 cash and a used truck that
originally cost $35,000 and had accumulated depreciation of $15,000.The truck’s market value
was $16,000. Sami, a builder, contributed a new storage garage. His cost of construction was
$40,000. The garage has a market value of $55,000. What is the combined total capital that
would be recorded on the partnership books for the two partners?
A. $79,000.
B. $60,000.
C. $75,000.
D. $90,000.

6. The NBC Company reports net income of $60,000. If partners N, B, and C have an income
ratio of 50%, 30%, and 20%, respectively, C’s share of the net income is:
A. $30,000.
B. $12,000.
C. $18,000.
D. No correct answer is given.

7. Using the data in (4) above, what is B’s share of net income if the percentages are applicable
after each partner receives a $10,000 salary allowance?
A. $12,000
B. $20,000
C. $19,000
D. $21,000

8. To close a partner’s drawing account, an entry must be made that:

A. Debits that partner’s drawing account and credits income summary.
B. Debits that partner’s drawing account and credits that partner’s capital account.
C. Credits that partner’s drawing account and debits that partner’s capital account.
D. Credits that partner’s drawing account and debits the firm’s dividend account.

9. Which of the following statements about partnership financial statements is true?

A. Details of the distribution of net income are shown in the owners’ equity statement.
B. The distribution of net income is shown on the balance sheet.
C. Only the total of all partner capital balances is shown in the balance sheet.
D. The owners’ equity statement is called the partners’ capital statement.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
10. In the liquidation of a partnership it is necessary to (1) distribute cash to the partners, (2) sell
noncash assets, (3) allocate any gain or loss on realization to the partners, and (4) pay
liabilities.These steps should be performed in the following order:
A. (2), (3), (4), (1).
B. (2), (3), (1), (4).
C. (3), (2), (1), (4).
D. (3), (2), (4), (1).

Use the following account balance information for HME Partnership to answer questions 11 and
12. Income ratios are 2:4:4 for Haile, Mike, and Eleny, respectively.

Assets Liabilities and Owners’ Equity

Cash $ 9,000 Accounts payable $ 21,000
Accounts receivable 22,000 Harriet,Capital 23,000
Mike, Capital 8,000
Inventory 73,000 Elly, Capital 52,000
$104,000 $104,000

11. Assume that, as part of liquidation proceedings, Haile sells its noncash assets for
$85,000.The amount of cash that would ultimately be distributed to Eleny would be:
A. $52,000.
B. $48,000.
C. $34,000.
D. $86,000.

12. Assume that, as part of liquidation proceedings, Haile sells its noncash assets for $60,000. As
a result, one of the partners has a capital deficiency which that partner decides not to repay. The
amount of cash that would ultimately be distributed to Eleny would be:
A. $52,000.
B. $38,000.
C. $24,000.
D. $34,000.

13. Lakew purchases 50% of Lemlem’s capital interest in the K & L partnership for $22,000. If
the capital balance of Ketema and Lemilem are $40,000 and $30,000, respectively, Lakewu’s
capital balance following the purchase is:
A. $22,000.
B. $35,000.
C. $20,000.
D. $15,000.

14. Capital balances in the MEM partnership are Mary, Capital $60,000, Ellen, Capital $50,000,
and Mills, Capital $40,000, and income ratios are 5 : 3 : 2, respectively. The MEMO partnership
is formed by admitting Oleg to the firm with a cash investment of $60,000 for a 25% capital
interest. The bonus to be credited to Mills, Capital in admitting Oleg is:

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
A. $10,000.
B. $7,500.
C. $3,750.
D. $1,500.
15. Capital balances in the MURF partnership are Molly, Capital $50,000,Ursula,Capital
$40,000,Ray,Capital $30,000, and Fred, Capital $20,000, and income ratios are 4 : 3 : 2 : 1,
respectively. Fred withdraws from the firm following payment of $29,000 in cash from the
partnership. Ursula’s capital balance after recording the withdrawal of Fred is:
A. $36,000.
B. $37,000.
C. $38,000.
D. $40,000.

Attempt the Following Questions

1. What are the disadvantages of the partnership over the corporation as a

form of organization for a profit making business enterprise?

______________________________________________________________________
______________________________________________________________________

2. Explain the difference between the admission of a new partner to a

partnership (a) by purchase of an interest from another partner and (b) by contribution
of assets to the partnership.

______________________________________________________________________
______________________________________________________________________

3. When a new partner is admitted to a partnership and goodwill is

attributable to the old partnership, how should the amount of the goodwill be allocated
to the capital accounts of the original partners?

______________________________________________________________________
______________________________________________________________________

Work out Questions

1. Abebe and Kebede formed a partnership. Abebe invested Birr 90,000 and Kebede
invested Birr 60,000. Abebe is to devote one-half time to the business while kebede is
to devote full time.

The following plans for the division of income are being considered:

1. Equally

2. In the ratio of original investments

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
3. In the ratio of time devoted to the business

4. Interest of 12% on original investments and the reminder equally

5. Interest of 12% on original investments, salaries of Birr 10,000 to Abebe and Birr
20,000 to Kebede, and the remainder equally.

Required:

Determine the division of income to Abebe and Kebede under each plan assuming the
partnership earned a net income of 150,000 Birr.

2. The following balance sheet is related to HARVEST partnership owned by Mr.

Y,G and A.

YGA Partnership

Balance sheet

Meskerem 10,1995

Assets: Liabilities and Capital

Cash ----------------- Birr 20,000 Liabilities --------------- Birr 30,000

Other assets ------------ 80,000 Capital:

Y. capital -------------------- 40,000

G. capital ------------------- 21,000

A. capital --------------------- 9,000

Total Liabilities and

Total Assets ----------- Birr 100,000 Capital -------------------- 100,000

The partners agreed to liquidate the business enterprise by selling other assets and
dividing any remaining cash available in the partnership after settling the debt of the
partnership as of the date of liquidation. All the partners are general partners. Partner
Y,G and A share income or loss in the ratio of 20%, 40%, and 40% respectively.

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By: Dr. Mesele K.
Wolaita sodo university Accounting for partnerships
Required:

A. Prepare a liquidation statement assuming that the other assets were realized for:
i) Birr 80,000
ii) Birr 100,000
iii) Birr 60,000
iv) Birr 50,000
B. Journalize the necessary entries for the business enterprise on the basis of the
liquidation statement prepared for each case.

3. A, B, and C are partners with profit-and-loss sharing ratios of 20%, 60%,and 20%,
respectively; the partnership balance sheet consisted of cash of Br 20,000, noncash assets
of Br 270,000, liabilities of Br 40,000, and capital balances of Br 140,000 for A, Br
60,000 for B, and Br 50,000 for C; the partnership was liquidated by selling the noncash
assets for Br 310,000; the partners have sufficient cash to make up any capital
deficiencies.

Instruction: prepare the statement of liquidation and record the necessary journal entries.
4. A, B, and C are partners with profit-and-loss sharing ratios of 20%, 60%,and 20%,
respectively; the partnership balance sheet consisted of cash of Br 20,000, noncash assets
of Br 270,000, liabilities of Br 40,000, and capital balances of Br 140,000 for A, Br 60,000
for B, and Br 50,000 for C; the partnership was liquidated by selling the noncash assets
for Br 220,000; the partners have sufficient cash to make up any capital deficiencies.
Instruction: prepare the statement of liquidation and record the necessary journal entries.
5. A, B, and C are partners with profit-and-loss sharing ratios of 20%, 60%, and 20%,
respectively; the partnership balance sheet consisted of cash of Br 20,000, noncash assets
of Br 270,000, liabilities of Br 40,000, and capital balances of Br 140,000 for A, Br 60,000
for B, and Br 50,000 for C; the partnership was liquidated by selling the noncash assets
for Br 160,000; the partners have sufficient cash to make up any capital deficiencies.
Instruction: prepare the statement of liquidation and record the necessary journal entries.

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