FA SessionNo16 17

Course: Financial Accounting
Session: 16-17
Instructor: M Faisal
Course: Financial Accounting
Program: BBA
Semester: 2
Topic: Partnership
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Partnership
Session Contents Activities
#
Class activity1: Discussion / Question Answer
Ø PARTNERSHIP on learning outcomes of the pre-reading
assignment.
Ø Characteristics
Ø Types of Partnerships Class activity2: Concepts will be built
through lecture & discussion.
Ø Types of Partners
Class activity3: Handout’s End of the
Ø Partnership Agreement
Chapter practice questions -
Ø Formation of a Partnership
Pr C.1 pg 1145, Pr C.3 pg 1145, Pr C.10 pg
16-17 Firm
1146, Pr C.11 pg 1146
Ø Distribution of
Home assignment:
Profits/Losses
Ø Admission of a Partner Revise the lecture & problem solved in the
class. Read the topic due for discussion in
Ø Dissolution of a Partnership the next class.
Firm
Pr C.9 pg 1147-8
LO 1
Partnerships
A partnership is an association of two or more

persons who own and manage a business for
profit. Characteristics of a partnership include the
following:
 No limitation on legal liability
 Not taxable
 Limited life
 Limited ability to raise capital (funds)
LO 1
Partnerships
A limited partnership is a unique legal form that

provides partners who are not involved in the
operations of the partnership with limited liability.
 There must be at least one general partner who
operates the partnership.
 The remaining partners are considered limited
partners.
LO 2
Forming a Partnership
Joseph Stevens and Earl Foster, owners of competing

hardware stores, agree to combine their businesses in
a partnership. Stevens agrees to contribute the
following:
LO 2
Forming a Partnership
The entry to record the assets and liabilities

contributed by Stevens is as follows:
The noncash assets are normally recorded at current

market value.
LO 2
Dividing Income—Services of Partners
The partnership agreement of Jennifer Stone and

Crystal Mills provides for Stone to receive a
monthly salary allowance of $5,000 ($60,000
annually) and Mills to receive $4,000 a month
($48,000 annually). If there is any remaining net
income, it is to be divided equally.
Income
Incomeand
andlosses
lossesofofthe
thepartnership
partnershipwould
wouldhave
havebeen
been
divided
dividedequally
equallyififno
nopartnership
partnershipagreement
agreementexisted
existedor
orifif
the
thepartnership
partnershipagreement
agreementdid
didnot
notspecify
specifyhow
howthe
the
division
divisionwas
wastotooccur.
occur.
LO 2
Dividing Income—Services of Partners
The firm had net income of $150,000 for the year.

Stone shared the net income as calculated below.
J. Stone C. Mills Total
Annual salary allowance $60,000 $48,000
$108,000
Remaining
Division income
of net income 21,000
$81,000 21,000
$69,000
42,000
$150,000
LO 2
Dividing Income—Services of Partners and Investments
The partnership agreement for Stone and Mills

divides income as follows:
 Partner salary allowances: $5,000 monthly for
Stone and $4,000 monthly for Mills
 Interest of 12% on each partner’s capital balance
as of January 1
 Any remaining income divided equally
LO 2
Dividing Income—Services of Partners and Investments

Salary allowance $60,000 $48,000 $108,000
Interest allowance 19,20014,400 33,600
Remaining income 4,200 4,200 8,400
Net income $83,400 $66,600 $150,000
LO 2
Dividing Income—Allowances Exceed Net Income
Assume the same salary and interest allowances as

in the preceding example, but that the net income is
only $100,000. In this case, the total of the
allowances exceeds the net income by $41,600
($100,000 - $141,600).
LO 2
The division of the partnership net income is

determined as follows:
Salary allowance $60,000 $48,000 $108,000
Interest allowance 19,200 14,400 33,600
Total $79,200 $62,400 $141,600
Deduct excess of
allowances over income 20,800 20,800 41,600
Net income $58,400 $41,600 $100,000
LO 2
LO 3
Withdrawal of a Partner
If the existing partners purchase the withdrawing

partner’s interest, the purchase and sale of the
partnership interest is between the partners as
individuals. The only entry is:
 To debit the capital account of the partner
withdrawing, and
 To credit the capital account of the partner or
partners buying the additional interest.
LO 3
Withdrawal or Death of a Partner
If the partnership purchases the withdrawing

partner’s interest, the assets and the owners’
equity of the partnership are reduced by the
purchase price.
 When a partner dies, the partnership accounts
should be closed as of the date of death. The net
income for the current period should then be
determined and divided among the partners’
capital accounts.
LO 4
Liquidating Partnerships
When a partnership goes out of business, the

winding-up process is called the liquidation of the
partnership.
 Although liquidation refers to the payment of
liabilities, it includes the entire winding-up
process.
 When the partnership goes out of business and the
normal operations are discontinued, the accounts
should be adjusted and closed.
LO 4
Farley, Green, and Hall decide to liquidate their
partnership. On April 9, after discontinuing business
operations and closing the accounts, the following
trial balance is prepared:
LO 4
Gain on Realization
 Farley, Green, and Hall share income and losses in a
ratio of 5:3:2 (50%, 30%, 20%).
 All noncash assets are sold in a single transaction for
$72,000, resulting in a gain of $8,000. Partner capital
accounts are credited $4,000, $2,400, and $1,600 to
Farley, Green, and Hall, respectively.
 Creditors are paid $9,000, and the remaining cash of
$74,000 is distributed to the partners.
 A statement of partnership liquidation summarizes
the liquidation process.
LO 4
Gain on Realization
Sale
Sale of
of Assets
Assets (Step
(Step 1)
1)
LO 4
Gain on Realization
Division
Division of
of Gain
Gain (Step
(Step 2)
2)
LO 4
Gain on Realization
Payment
Payment of
of Liabilities
Liabilities (Step
(Step 3)
3)
LO 4
Gain on Realization
Distribution
Distribution of
of Cash
Cash to
to Partners
Partners (Step
(Step 4)
4)
LO 4
Loss on Realization
Farley, Green, and Hall sell all noncash assets for

$44,000. A loss of $20,000 ($64,000 – $44,000) is
realized. The loss is distributed to Farley, Green, and
Hall in the income-sharing ratio of 5:3:2.
LO 4
Loss on Realization
Sale
Sale of
of Assets
Assets (Step
(Step 1)
1)
LO 4
Division
Division of
of Loss
Loss (Step
(Step 2)
2)
LO 4
Payment
Payment of
of Liabilities
Liabilities (Step
(Step 3)
3)
LO 4
Distribution
Distribution of
of Cash
Cash to
to Partners
Partners (Step
(Step 4)
4)
LO 4
Loss on Realization—Capital Deficiency
The share of a loss on realization may be greater

than the balance in a partner’s capital account.
The resulting debit balance in the capital account
is called a deficiency.
Farley, Green, and Hall sell all of the noncash assets for
$10,000. A loss of $54,000 ($64,000 – $10,000) is realized. The
share of the loss allocated to Farley, $27,000 (50% of
$54,000), exceeds the $22,000 balance in her capital account.
Farley contributes $5,000 to the partnership.
LO 4
Sale
Sale of
of Assets
Assets (Step
(Step 1)
1)
LO 4
Division
Division of
of Loss
Loss (Step
(Step 2)
2)
LO 4
Payment
Payment of
of Liabilities
Liabilities (Step
(Step 3)
3)
LO 4
Receipt
Receipt of
of Deficiency
Deficiency (Step
(Step 4)
4)
LO 4
Distribution
Distribution of
of Cash
Cash to
to Partners
Partners (Step
(Step 4)
4)
LO 5
Statement of Partnership Equity
The changes in the partners’ capital accounts for

a period of time are reported in a statement of
partnership equity.
The statement of members’ equity for an LLC is
similar to that of a partnership. It reports the
changes in member equity for a period.
Class Activity3
End of the Chapter practice question(s)

Pr C.1 pg 1145,
Pr C.3 pg 1145,
Pr C.10 pg 1146,
Pr C.11 pg 1146
Pr C.1 pg 1145
Pr C.9 pg 1147-8
Pr C.9 pg 1147-8
Pr C.9 pg 1147-8
Pr C.10 pg 1148
Pr C.10 pg 1148
Pr C.10 pg 1148
Pr C.11 pg 1148
Pr C.11 pg 1148
Pr C.11 pg 1148
Pr C.11 pg 1148
Questions & Answers

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Course: Financial Accounting

A partnership is an association of two or more

A limited partnership is a unique legal form that

Joseph Stevens and Earl Foster, owners of competing

The entry to record the assets and liabilities

The noncash assets are normally recorded at current

The partnership agreement of Jennifer Stone and

The firm had net income of $150,000 for the year.

The partnership agreement for Stone and Mills

J. Stone C. Mills Total

Assume the same salary and interest allowances as

The division of the partnership net income is

If the existing partners purchase the withdrawing

If the partnership purchases the withdrawing

When a partnership goes out of business, the

Farley, Green, and Hall sell all noncash assets for

The share of a loss on realization may be greater

The changes in the partners’ capital accounts for

End of the Chapter practice question(s)

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