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Partnerships
Formation, Operations,
and Changes in
Ownership Interests
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
16-1
Partnerships: Objectives
1. Comprehend the legal
characteristics of partnerships.
2. Understand initial investment
valuation and record keeping.
3. Grasp the diverse nature of profit
and loss sharing agreements and
their computation.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
16-2
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1: PARTNERSHIP
CHARACTERISTICS
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Partnerships
RUPA "Revised Uniform Partnership Act
Has been adopted by most states
Entity theory:
partners own their share of the partnership, but not
its individual assets
Dissociation:
partners can dissociate without dissolution of the
partnership
Partners have
Mutual agency the ability to legally bind the partnership
Unlimited liability liable for partnership debts,
including the use of personal assets
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
16-5
Articles of Partnership
The partnership agreement should
specify:
1. Products or services, line of business
2. Partner rights and responsibilities
3. Initial investment and value assigned
to noncash investments
4. Additional investment conditions
5. Asset withdrawals
6. Profit and loss sharing
7. Dissolution procedures
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
16-6
Partnership Reporting
Financial reporting should provide for
the needs of
Partners
Creditors of the partnership
IRS partnerships do not pay federal
income taxes, but partnership tax returns
allow the IRS to verify that each partner pays
income taxes on their share of partnership
income
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
16-7
2: INITIAL INVESTMENT
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Initial Investment
A partnership is started by Amy and Paul, each
investing cash.
Cash
Amy Capital
Cash
Paul Capital
XXX
Cash
Equipment
Land
Paul Capital
XXX
XXX
XXX
XXX
XXX
XXX
XXX
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16-10
7
35
10
40
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
46
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46
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$50
$50
Paul's 50%($100)
He invests:
Cash
$7
Inventory $35
Goodwill
Land
Building
Amy Capital
To record Amy's investment
Cash
Inventory
Goodwill
Copyright 2012 Pearson Education,
Paul Capital
Inc. Publishing as Prentice Hall
$50
$42
$8
10
40
50
7
35
8
50
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Amy Capital
Amy Drawings
Amy Withdrawals
XXX
XX
XX
Paul Capital
XXX
Paul Drawings
Income Summary
Profit
Amy Capital
Paul Capital
To sharethe
profits
between
Amy
andcause
Paul
Income is shared between
partners.
A loss
would
XXX
XXX
XXX
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Allocating Income
Partners allowances for bonus, salary and
interest are allocated to them, whether or not
sufficient profits exist.
Remaining profits (or deficit) are then split
according to the agreed-upon proportions.
These are general procedures. The partnership
articles provide the specific requirements.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
16-21
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Lot Babel
$60
0
40
$30
0
35
(27) (18)
exceed
$500)
$73
$47
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4: ADMITTING A NEW
PARTNER
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Assignment
Assignment gives the assignee the right to a
share of future earnings and share of assets in
liquidation
Not a partner
No share in management
Old Partner Capital
Assignee Capital
XXX
XXX
16-27
Abby
Bing
Cobb
Total
25
25
Before
Capital Share
$50
50%
50
50%
$100
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
After
Capital Share
$25
25%
50
50%
25
25%
$100
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120
90
Goodwill
30
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After
Before Revaluation revaluation
$50
$15
$65
40
15
55
$90
$120
Transfer
($35)
(25)
60
Final
$30
30
60
$120
16-30
Before
$50
40
$90
Transfer Final
($27.5) $22.5
(17.5) 22.5
45.0
45.0
$90.0
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15
15
60
45
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Al
Bev
Cal
Total
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Before Investment
$50
40
$50
$90
Bonus
($1)
(1)
2
Final
$49
39
52
$140
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20
10
10
60
60
50
1
1
52
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5: DEATH OR RETIREMENT
OF A PARTNER
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Dissociation
Firm value, according to the Uniform Partnership
Act, is the greater of
Liquidation value
Sales value as a going concern without the dissociated
partner
Payment to exiting partner may be
Equal to existing capital
More than existing capital
Implied goodwill or bonus to exiting partner
Less than existing capital
Write down overvalued assets, or bonus to remaining
partners
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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80
80
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Excess Payment:
Bonus to Exiting Partner
Mo Capital
Nel Capital
Owen Capital
Cash
80
8
4
92
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Excess Payment:
Goodwill Recorded
Owen Capital
Goodwill
Cash
80
12
92
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Excess Payment:
Used to Revalue Partnership Capital
Goodwill
Mo Capital
Nel Capital
Owen Capital
30
12
6
12
92
92
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6: LIMITED PARTNERSHIPS
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Limited Partnerships
Limited partnerships must have one or
more general partners with unlimited
liability for partnership debt.
There may be any number of limited
partners.
Excluded from participating in management
Limited liability for partnership debt
Partnership agreement must be in writing,
signed and filed
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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