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CHAPTER 12
ACCOUNTING FOR PARTNERSHIPS AND
LIMITED LIABILITY COMPANIES
EYE OPENERS
- Proprietorship: Ease of formation and nontaxable entity. Partnership: Expanded owner expertise and capital, nontaxable entity, and ease of formation. Limited liability company: Limited liability to owners, expanded access to capital, nontaxable entity, and ease of formation.
- 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.
- Yes. A partnership may incur losses in excess of the total investment of all partners. The division of losses among the partners would be 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.
- The partnership agreement (partnership) or operating agreement (LLC) establishes the income-sharing ratio among the partners (members), amounts to be invested, and buy-sell agreements between the partners (members). In addition, for an LLC the operating agreement specifies if the LLC is owner-managed or manager-managed.
- Equally.
- 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 lose more than one- third of the losses if one partner is unable to absorb his share of the losses.
- The delivery equipment should be recorded at $10,000, the valuation agreed upon by the partners.
- The accounts receivable should be recorded by a debit of $150,000 to Accounts Receivable and a credit of $15,000 to Allowance for Doubtful Accounts.
- 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.
- 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.
- 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.
- 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, since the land was not revalued, C receives 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. 145145
- 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.
- a. Losses and gains on realization are divided among partners in the income- sharing ratio. b. Cash is distributed to the partners according to their ownership claims, as indicated by the credit balances in their capital accounts, after taking into consideration the potential deficiencies that may result from the inability to collect from a deficient partner.
- The statement of partners’ equity (for a partnership) and statement of members’ equity (for an LLC) both show the material changes in owner’s equity for each ownership person or class for a specified period. 146146
PE 12–2B
Distributed to Hutchins: Hutchins Jenkins Total Annual salary................................................... $ 24,000 $ — $ 24, Interest............................................................. 7,200^1 9,600^2 16, Deduct excess of allowances over income.. (3,200)^3 (1,600)^4 (4,800) Total distributed to Hutchins......................... $ 28,000 $ 8,000 $ 36, (^1) $60,000 × 12% (^2) $80,000 × 12% (^3) ($36,000 – $24,000 – $16,800) × 2/ (^4) ($36,000 – $24,000 – $16,800) × 1/
PE 12–3A
a. Equipment.................................................................... 12, Jordon Garmon, Capital........................................ 8, Kali Miller, Capital.................................................. 4, b. Cash.............................................................................. 64, Brandon Tarr, Capital............................................ 64,
PE 12–3B
a. Land.............................................................................. 16, Weston Perry, Capital............................................ 8, Drew Akins, Capital............................................... 8, b. Drew Yancy, Capital.................................................... 16, Jamarcus Webster, Capital................................... 16,500* *($25,000 + $8,000) × 50%
PE 12–4A
Equity of Maples................................................................................ $ 65, Baker contribution............................................................................ 25, Total equity after admitting Baker................................................... $ 90, Baker’s equity interest...................................................................... × 30% Baker’s equity after admission........................................................ $ 27, Baker’s contribution......................................................................... 25, Bonus paid to Baker......................................................................... $ 2,
PE 12–4B
Equity of Amory................................................................................. $ 340, Perez’s contribution.......................................................................... 550, Total equity after admitting Perez................................................... $ 890, Perez’s equity interest...................................................................... × 60% Perez’s equity after admission........................................................ $ 534, Perez’s contribution.......................................................................... $ 550, Perez’s equity after admission........................................................ 534, Bonus paid to Amory........................................................................ $ 16,
PE 12–5A
Penn’s equity prior to liquidation......................................... $160, Realization of asset sales...................................................... $250, Book value of assets ($160,000 + $100,000 + $15,000)...... 275, Loss on liquidation................................................................ $ 25, Penn’s share of loss (50% × $25,000).................................. (12,500) Penn’s cash distribution....................................................... $147,
PE 12–5B
Myers’s equity prior to liquidation....................................... $22, Realization of asset sales...................................................... $65, Book value of assets ($22,000 + $30,000 + $6,000)............ 58, Gain on liquidation................................................................. $ 7, Myers’s share of gain (50% × $7,000)................................... 3, Myers’s cash distribution...................................................... $25,
PE 12–6A
a. Min’s equity prior to liquidation...................................... $ 120, Realization of asset sales................................................ $ 60, Book value of assets........................................................ 320,000* Loss on liquidation........................................................... $260, Min’s share of loss (50% × $260,000)............................. (130,000) Min’s deficiency................................................................ $ (10,000) *$120,000 + $200, b. $60,000. $200,000 – $130,000 share of loss – $10,000 Min deficiency, also equals the amount realized from asset sales.
EXERCISES
Details
Ex. 12–
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, Jasmine’s conclusion was correct, but for the wrong reasons. In addition, note that the monthly drawings have no impact on the division of income.
Ex. 12–
a. Net income: $188, Bowman Mapes Total Salary allowance............................................. $ 75,000 $60,000 $135, Remaining income.......................................... 31,800 21,2 00 53 , Net income....................................................... $106,800 $81,200 $188, Bowman remaining income: ($188,000 – $135,000) × 3/ Mapes remaining income: ($188,000 – $135,000) × 2/ b. (1) Income Summary.................................................................. 188, B. Bowman, Member Equity........................................... 106, S. Mapes, Member Equity............................................... 81, (2) B. Bowman, Member Equity................................................ 75, S. Mapes, Member Equity.................................................... 60, B. Bowman, Drawing....................................................... 75, S. Mapes, Drawing........................................................... 60, Note: The reduction in members’ equity from withdrawals would be disclosed on the statement of members’ equity but does not affect the allocation of net income in part (a) of this exercise.
Ex. 12–
a. Daily Sun WYXT Lindsey Newspaper, Partners Wilson LLC Total Salary allowance....................... $115,600 $115, Interest allowance..................... $ 24,000^1 6,0 002 $ 14,400^3 44,4 00 Remaining income (4:3:3)........ 196 ,000 147,000 147,000 490 , Net income................................. $220,000 $268,600 $161,400 $650, (^1) 12% × $200, (^2) 12% × $50, (^3) 12% × $120, b. Dec. 31, 2010 Income Summary.............................................. 650, WYXT Partners, Member Equity................ 220, Lindsey Wilson, Member Equity................ 268, Daily Sun Newspaper, LLC, Member Equity...................................................... 161, Dec. 31, 2010 WYXT Partners, Member Equity...................... 24, Lindsey Wilson, Member Equity..................... 121, Daily Sun Newspaper, LLC, Member Equity 14, WYXT Partners, Drawing............................ 24, Lindsey Wilson, Drawing........................... 121, Daily Sun Newspaper, LLC, Drawing........ 14, c. INTERMEDIA, LLC Statement of Members’ Equity For the Year Ended December 31, 2010 Daily Sun WYXT Lindsey Newspaper, Partners Wilson LLC Total Members’ equity, January 1, 2010......... $200,000 $ 50,000 $120,000 $ 370, Additional investment during the year 50,000 50, $250,000 $ 50,000 $120,000 $ 420, Net income for the year.......................... 220,0 00 268,600 161,400 650 ,
Ex 12–
a. Jan. 31 Partner, Drawing.................................. 30,000, Cash................................................. 30,000, b. Dec. 31 Income Summary................................. 400,000, Partner, Capital............................... 400,000, c. Dec. 31 Partner, Capital..................................... 360,000,000* Partner, Drawing............................. 360,000, *12 months × £30 million
Ex. 12–
a. and b. Lia Wu, Capital................................................................ 50, Kara Oliver, Capital.................................................... 50, $150,000 × 1/ Note: The sale to Oliver is not a transaction of the partnership; so, the sales price is not considered in this journal entry.
Ex. 12–
a. $1,922,000 ($940,000,000/489), rounded b. $400,000 ($195,600,000/489) c. A new partner might contribute more than $400,000 because of goodwill attributable to the firm’s reputation, future income potential, and a strong client base, etc.
The bonus to Harris is debited equally between Taylor’s and Garcia’s The bonus to Taylor and Garcia is credited equally between Taylor’s and
- Ex. 12–
- Cash........................................................................................ 13 ,
- Accounts Receivable............................................................ 130,
- Merchandise Inventory............................................................ 84,
- Equipment............................................................................... 69,
- Allowance for Doubtful Accounts....................................... 10,2
- Gwen Delk, Capital.......................................................... 287,
- Ex. 12–
- Cash....................................................................................... 40,
- Accounts Receivable............................................................ 75,
- Land........................................................................................ 250,
- Equipment.............................................................................. 21,
- Allowance for Doubtful Accounts................................. 6,
- Accounts Payable............................................................ 22,
- Notes Payable.................................................................. 65,
- Brandi Bonds, Capital..................................................... 292,
- Ex. 12–
- a. $100,000 $100, Hassell Lawson
- b. 150,000 50,
- c. 96,800 103,
- d. 90,000 110,
- e. 102,000 98,
- a. Net income (1:1)........................................... $100,000 $100,000 $200, Hassell Lawson Total
- b. Net income (3:1)........................................... $150,000 $ 50,000 $200,
- c. Interest allowance........................................ $ 36,000 $ 12,000 $ 48,
- Remaining income (2:3)............................... 60,800 91,200 152,
- Net income.................................................... $ 96,800 $103,200 $200,
- d. Salary allowance.......................................... $ 50,000 $ 70,000 $120,
- Remaining income (1:1)............................... 40,000 40,000 80,
- Net income.................................................... $ 90,000 $110,000 $200,
- e. Interest allowance........................................ $ 36,000 $ 12,000 $ 48,
- Salary allowance.......................................... 50,000 70,000 120,
- Remaining income (1:1)............................... 16,000 16,000 32,
- Net income.................................................... $102,000 $ 98,000 $200,
- $470,000 $318,600 $281,400 $1,070,
- Withdrawals during the year.................. 24,000 121,600 14,4 00 160,
- Members’ equity, December 31, 2010... $446,000 $197,000 $267,000 $ 910,
- Ex. 12–
- a. (1) Brad Hughes, Capital (20% × $120,000)................. 24, - Mitchell Isaacs, Capital (25% × $100,000).............. 25, - Leah Craft, Capital.............................................. 49,
- (2) Cash........................................................................... 50, - Jayme Clark, Capital........................................... 50,
- b. Brad Hughes ($120,000 – $24,000)....................... 96, - Mitchell Isaacs ($100,000 – $25,000).................... 75, - Leah Craft............................................................... 49, - Jayme Clark............................................................ 50, - Ex. 12–
- a. Cash................................................................................. 45, - Travis Harris, Capital..................................................... 7, - Keelyn Kidd, Capital...................................................... 7, - Felix Flores, Capital................................................... 60,
- b. Travis Harris........................................................... 52, - Keelyn Kidd............................................................ 82, - Felix Flores............................................................. 60, - Ex. 12–
- a. Medical Equipment........................................................... 25, - Douglass, Member Equity.......................................... 10,000 - Finn, Member Equity................................................... 15,000
- 1 $25,000 × 2/5 = $10,
- 2 $25,000 × 3/5 = $15,
- b. (1) Cash.............................................................................. 310, - Douglass, Member Equity..................................... 22, - Finn, Member Equity.............................................. 33, - Koster, Member Equity.......................................... 255, - Equity of Douglass........................................ $250, - Equity of Finn................................................. 290, - Contribution by Koster.................................. 310, - Total equity after admitting Koster.............. $850, - Koster’s equity after admission................... $255, Koster’s equity interest after admission..... × 30% - Contribution by Koster.................................. $310, - Koster’s equity after admission................... 255, - Bonus paid to Douglass and Finn............... $ 55, - Douglass: $55,000 × 2/5 = $22, - Finn: $55,000 × 3/5 = $33,
- b. (2) Cash.............................................................................. 160, - Douglass, Member Equity.......................................... 6, - Finn, Member Equity................................................... 9, - Koster, Member Equity.......................................... 175, - Equity of Douglass........................................ $250, Supporting calculations for the bonus: - Equity of Finn................................................. 290, - Contribution by Koster.................................. 160, - Total equity after admitting Koster.............. $700, - Koster’s equity after admission................... $175, Koster’s equity interest after admission..... × 25% - Contribution by Koster.................................. 160, - Bonus paid to Koster.................................... $ 15, - Douglass: $15,000 × 2/5 = $6, - Finn: $15,000 × 3/5 = $9,
- Ex. 12–
- a. J. Taylor, Capital.......................................................... 4,
- K. Garcia, Capital......................................................... 4, - Equipment......................................................... 8,
- b. (1) Cash........................................................................ 50, - J. Taylor, Capital.................................................... 3, - K. Garcia, Capital................................................... 3, - L. Harris, Capital............................................... 56, - Equity of Taylor...................................................................... $ 96, Supporting calculations for the bonus: - Equity of Garcia...................................................................... 135, - Contribution by Harris........................................................... 50, - Total equity after admitting Harris....................................... $281, - Harris’s equity after admission............................................. $ 56, Harris’s equity interest after admission.............................. × 20% - Contribution by Harris........................................................... 50, - Bonus paid to Harris.............................................................. $ 6,
- b. (2) Cash........................................................................ 125, capital accounts. - J. Taylor, Capital............................................... 9, - K. Garcia, Capital.............................................. 9, - L. Harris, Capital............................................... 106, - Equity of Taylor...................................................................... $ 96, Supporting calculations for the bonus: - Equity of Garcia...................................................................... 135, - Contribution by Harris........................................................... 125, - Total equity after admitting Harris....................................... $356, - Harris’s equity after admission............................................. $106, Harris’s equity interest after admission.............................. × 30% - Contribution by Harris........................................................... $125, - Harris’s equity after admission............................................. 106, - Bonus paid to Taylor and Garcia.......................................... $ 18,
Ex. 12–
ANGEL INVESTOR ASSOCIATES
Statement of Partnership Equity For the Year Ended December 31, 2010 Total Jen Teresa Jaime Partner- Wilson, McDonald, Holden, ship Capital Capital Capital Capital Partnership capital, January 1, 2010......... $ 45,000 $ 55,000 $100, Admission of Jaime Holden....................... — — $ 25 ,000 25, Salary allowance......................................... 30 ,000 30 , Remaining income...................................... 46,8 00 57,2 00 26 ,000 130, Less: Partner withdrawals......................... (38,400) (28,600) (13,000) (80,000) Partnership capital, December 31, 2010... $ 83,400 $ 83,600 $ 38,000 $205, Admission of Jaime Holden: Equity of initial partners prior to admission.................. $100, Contribution by Holden.................................................... 25, Total.................................................................................... $125, Holden’s equity interest after admission....................... × 20% Holden’s equity after admission..................................... $ 25, Contribution by Holden.................................................... 25, No bonus........................................................................... $ 0 Net income distribution: The income-sharing ratio is equal to the proportion of the capital balances after admitting Holden according to the partnership agreement: Jen Wilson: $ 125 , 000 $ 45 , 000 = 36% Teresa McDonald: $ 125 , 000 $ 55 , 000 = 44% Jaime Holden: (^) $ 125 , 000 $ 25 , 000 = 20% These ratios can be multiplied by the $130,000 remaining income ($160,000 – $30,000 salary allowance to Wilson) to distribute the earnings to the respective partner capital accounts. Withdrawals:
Ex. 12–
Ex. 12–
a. Merchandise Inventory.................................................. 24, Allowance for Doubtful Accounts........................... 5, Luke Gilbert, Capital................................................. 7,800^1 Marissa Cohen, Capital............................................ 5,200^2 Tyrone Cobb, Capital............................................... 5,200^2 (^1) ($24,000 – $5,800) × 3/ (^2) ($24,000 – $5,800) × 2/ b. Luke Gilbert, Capital...................................................... 252,800^1 Cash........................................................................... 52, Notes Payable........................................................... 200, (^1) $245,000 + $7,
Ex. 12–
a. The income-sharing ratio is determined by dividing the net income for each member by the total net income. Thus, in 2010, the income-sharing ratio is as follows: Nevada Properties, LLC: (^) $ 300 , 000 $ 90 , 000 = 30% Star Holdings, LLC: $ 300 , 000 $ 210 , 000 = 70% Or a 3:7 ratio b. Following the same procedure as in (a): Nevada Properties, LLC: $ 400 , 000 $ 100 , 000 = 25% Star Holdings, LLC: (^) $ 400 , 000 $ 220 , 000 = 55% Randy Reed: $ 400 , 000 $ 80 , 000 = 20% c. Randy Reed provided a $290,000 cash contribution to the business. The amount credited to his member equity account is this amount less a $20, bonus paid to the other two members, or $270,000.
Ex. 12–18 Concluded
d. The positive entries to Nevada Properties and Star Holdings are the result of a bonus paid by Randy Reed. e. Randy Reed acquired a 20% interest in the business, computed as follows: Randy Reed’s contribution.................................. $ 290, Nevada Properties, LLC, member equity........... 540 , Star Holdings, LLC, member equity................... 520 , Total....................................................................... $1,350, Reed’s ownership interest after admission ($270,000 ÷ $1,350,000)........................................ 20%
Ex. 12–
a. Cash balance................................................... $ 16, Sum of capital accounts................................. 20, Loss from sale of noncash assets................ $ 4, Pryor Lester Capital balances before realization............... $ 12,000 $8, b. Division of loss on sale of noncash assets 2,000* 2,000* Balances........................................................... $ 10,000 $6, c. Cash distributed to partners.......................... 10,000 6, Final balances................................................. $ 0 $ 0 *$4,000/
Ex. 12–
Bradley Barak Total Capital balances before realization............... $ 26,000 $35,000 $61, Division of gain on sale of noncash assets [($76,000 – $61,000)/2]............................... 7,500 7,5 00 Capital balances after realization.................. $ 33,500 $42, Cash distributed to partners.................. 33,500 42, Final balances................................................. $ 0 $ 0
