Principle of Accounting 1 chap.ppt

Partnerships Chapter13 FECTURESOFTHEPARTNERSHIP Apartnershipisdefinedasanassociationoftwoormoreindividualswhocarryonasco ownersabusinessforprofit Ingeneral accountingforapartnershipfollowsthesamerulesasforasoleproprietorshipwiththeexceptionthatthereareseparatedrawingandcapitalaccountsforeachpartner Themajorcharacteristicsofpartnershipformofbusinessare LimitedlifeEaseofformationOwnershipofpropertyUnlimitedliabilityAllocationofnetincomeornetlossMutualagency INITIALPARTNERSHIPINVESTMENTS WhenaninvestmentismadebyapartnerthejournalentryisWhenanoncashassetisinvesteditshouldberecordedatitsfairmarketvalueatthedateoftransfertothepartnership Anobligationassumedbythepartnershipiscreditedtothespecificliabilityaccountinvolved AssetCapital Seeexample1 2 Example1 EnrightandGellerfromapartnership Enright whowaspreviouslythesoleproprietor bringsthefollowingintothepartnership ThefollowingentryismadetorecordEnright sinitialinvestment Depreciationontheautoonthepartnershipbookswillbebasedontheassignedvalueof 5 500 Investmentmadesubsequenttotheformationofthepartnershiparecreditedtothecapitalaccounts Cash12 000AccountsReceivable7 000Inventory18 000Auto5 500AllowanceforUncollectibleAccounts600AccountsPayable9 900Enright Capital32 900 Example2 Enrightinvests 5 000cashandGellerinvestsofficesuppliersof 1 000 Theentryis Cash5 000OfficeSupplies1 000Enright Capital5 000Geller Capital1 000 PARTNERDRAWINGACCOUNTS Thepartner sdrawingaccountistreatedthesamewayasthedrawingaccountoftheownerinthesingleproprietorship Apersonalwithdrawalbyapartnerrepresentsadisinvestmentinthebusinessandrequirethefollowingjournalentry Ifanassetotherthancashiswithdrawn thatspecificassetiscredited Mr Ms X DrawingCash ALLOCATINGNETINCOMEORLOSSTOPARTNERS Partnershipnetincomeorlossisdividedinthemannerspecifiedinthepartnershipagreement Usually thedivisionisbasedupontheproportionatecapitalinterestofeachpartner DIVISIONBASEDONCAPITALINTEREST Example3NelsonandLevinehavecapitalbalancesof 40 000and 10 000 respectively Thenetincomefortheyearis 5 000 whichistobedividedbaseduponthecapitalbalances Thejournalentryis IncomeSummary5 000Nelson Capital4 000Levine Capital1 000 DIVISIONBASEDEQUALLY Example4AssumethesamefactsinExample3exceptthatprofitistobesharedequally Theentryis IncomeSummary5 000Nelson Capital2 500Levine Capital2 500 DIVISIONBASEDPARTIALLYONSALARY Example5AssumethesamefactsasinExample3exceptthatNelsonandLevineareassignedsalaryallowanceof 2 000and 800 respectively Theremainingnetincomeistobeallocatedbasedontheircapitalbalances Thecomputationis 40 000 50 000 2 200 1 760 10 000 50 000 2 200 440 Thejournalentryis IncomeSummary5 000Nelson Capital3 760Levine Capital1 240 DIVISIONBASEDPARTIALLYONINTEREST Example6AssumethesamefactsasinExample3exceptthateachpartneristoreceive8percentinterestonhisorhercapitalandtheremainingearningsaretobedividedequally ThecomputationisThejournalentryis IncomeSummary5 000Nelson Capital3 700Levine Capital1 300 DIVISIONBASEDPARTIALLYONSALARYANDINTEREST Example7AssumethesamefactsasinExample3exceptthatNelsonandLevinearetogetsalariesof 1 000and 600 respectively receive5percentinterestoncapital anddividetheremainderoftheprofitequally Thecomputationis Itispossiblethatinsomecasesthenetincomemaybelessthanthesalaryand orinterestallowancesforthepartners Ifso theremainingnegativebalanceshouldbeallocatedtothepartnersasifitwerealoss Seeexample8 Example8AssumethatinExample7theinterestrateonthecapitalbalanceswas9percent ThecomputationisThejournalentryis IncomeSummary5 000Nelson Capital4 050Levine Capital950 ADMITINGANEWPARTNER UndertheUniformPartnershipActapartnerhastheoptiontosellallorpartofhisorherinterestinthepartnershipwithouttheconsentoftheothers Theindividualwhoacquiresthesellingpartner sinterestobtainstherighttoshareinprofits However unlessadmittedtothefirm theindividualdoesnothavetherighttovoteorparticipateinpartnershipaffairs ADMISSIONBYACQUIRINGANINTEREST Anewpartnerwhobuysaninterestfromanoldpartnerpaysthepurchasepricedirectlytotheoldpartner Anentryismadeonthepartnershipbookstotransferonlythecapitalfromtheoldpartnertothenewone Allotheraccountsareleftintact Seeexample9 Example9SimonandDavishavecapitalbalancesof 60 000and 40 000 respectively SmithpurchaseshalfofSimon sinterestfor 33 000 TheentrytotransferthecapitalbalancesisNotethat 30 000 halfofSimon scapital hasbeentransferredtoSmith Theextra 3 000paidbySmithtoSimonisnotreflectedinthepartnershipbooks Ratherthe 3 000isinthenatureofpersonalbenefittoSimon Simon Capital30 000Smith Capital30 000 ADMISSIONBYCONTRIBUTINGASSETS Thenewpartnermaycontributeassetstothefirm TheentryisSeeexample10 AssetCapital Example10 AssumethesamefactsinExample9exceptthatSmithcontributes 25 000foraone fifthinterestinthenewpartnership Thejournalentryis Cash25 000Smith Capital25 000 Inthepriortwoexamples weassumedthatthebookvalueoftheassetsofthepartnershipwerereflectiveoftheirfairmarketvalueatthetimethatSmithwasadmitted Hence noadjustmentstotherecordedvalueswereneeded However inmostcases partnershipassetshavetoberevaluedorgoodwillrecognizedpriortotheadmissionofanewpartner Assetrevaluation Priortoadmittinganewpartner certainassetsofthepartnershiphavetobeadjustedfrombookvaluetofairmarketvalue Theneteffectofthisrevaluationisallocatedtotheexistingpartnersbasedontheprofit sharingratio Example11SimonandDavisshareprofitsequally PriortotheadmissionofSmith itisdecidedthatequipmenthavingabookvalueof 6 000isworth 7 500 Theentryfortherevaluationis Equipment1 500Simon Capital750Davis Capital750 Recordinggoodwill Whenapartnershipearnsexcessearningsoverothersimilarfirmsithasgoodwillassociatedwithit Whenanewpartnerisadmitted heorshemayhavetopayforthegoodwillofthepartnership Insuchacase thegoodwillaccountisdebitedandthecapitalaccountsoftheoldpartnersarecreditedbasedontheprofit and lossratio Seeexample12 Example12 SimonandDavishavecapitalbalancesof 60 000and 40 000 respectively Netincomeissharedequally Smithgainsadmissiontothepartnershipbycontributing 30 000foraone fifthinterest WhilethetotalcapitalofhepartnershippriortoSmith sadmissionis 100 000 thepartiesagreethatthefirmisworth 120 000 The 20 000excessrepresentsgoodwillthatmustbedividedequallybetweentheoldpartners Thejournalentrytorecordgoodwillis TheentrytoadmitthenewpartnerisNotethatSmithnowhasaone fifthinterestinthepartnership 30 000 150 000 Goodwill20 000Simon Capital10 000Davis Capital10 000 Cash30 000Smith capital30 000 Goodwillmaybeassociatedwiththein