CHAPTER 12Accounting for Partnerships and Limited Liability COMPANIES
EYE OPENERS
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1. 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.
2. 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.
3. 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.
4. 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.
5. Equally.
6. 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.
7. The delivery equipment should be recorded at $10,000, the valuation agreed upon by the partners.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
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14. 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.
15. 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.
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PRACTICE EXERCISES
PE 12–1A
Cash 24,000
Inventory 56,000
Land 114,000
Notes Payable 50,000
Josh Beach, Capital 144,000
PE 12–1B
Cash 22,000
Accounts Receivable 32,000
Patent 150,000
Accounts Payable 12,000
Allowance for Doubtful Accounts 2,000
Jen Hall, Capital 190,000
PE 12–2A
Distributed to Mooney:
Smithson Mooney Total
Annual salary $ — $ 53,000 $ 53,000
Interest 7,0001 21,0002 28,000
Remaining income 79,500 79,5003 159,000
Total distributed to Mooney $86,500 $ 153,500 $240,000
1$50,000 × 14%
2$150,000 × 14%
3($240,000 – $53,000 – $28,000) × 50%
PE 12–2B
Distributed to Hutchins:
Hutchins Jenkins Total
Annual salary $ 24,000 $ — $ 24,000
Interest 7,2001 9,6002 16,800
Deduct excess of allowances over income (3,200)3 (1,600)4 (4,800)
Total distributed to Hutchins $ 28,000 $ 8,000 $ 36,000
1$60,000 × 12%
2$80,000 × 12%
3($36,000 – $24,000 – $16,800) × 2/3
4($36,000 – $24,000 – $16,800) × 1/3
PE 12–3A
a. Equipment 12,000
Jordon Garmon, Capital 8,000
Kali Miller, Capital 4,000
b. Cash 64,000
Brandon Tarr, Capital 64,000
PE 12–3B
a. Land 16,000
Weston Perry, Capital 8,000
Drew Akins, Capital 8,000
b. Drew Yancy, Capital 16,500
Jamarcus Webster, Capital 16,500*
*($25,000 + $8,000) × 50%
PE 12–4A
Equity of Maples $ 65,000
Baker contribution 25,000
Total equity after admitting Baker $ 90,000
Baker’s equity interest × 30%
Baker’s equity after admission $ 27,000
Baker’s contribution 25,000
Bonus paid to Baker $ 2,000
PE 12–4B
Equity of Amory $ 340,000
Perez’s contribution 550,000
Total equity after admitting Perez $ 890,000
Perez’s equity interest × 60%
Perez’s equity after admission $ 534,000
Perez’s contribution $ 550,000
Perez’s equity after admission 534,000
Bonus paid to Amory $ 16,000
PE 12–5A
Penn’s equity prior to liquidation $ 160,000
Realization of asset sales $ 250,000
Book value of assets ($160,000 + $100,000 + $15,000) 275,000
Loss on liquidation $ 25,000
Penn’s share of loss (50% × $25,000) (12,500)
Penn’s cash distribution $ 147,500
PE 12–5B
Myers’s equity prior to liquidation $22,000
Realization of asset sales $65,000
Book value of assets ($22,000 + $30,000 + $6,000) 58,000
Gain on liquidation $ 7,000
Myers’s share of gain (50% × $7,000) 3,500
Myers’s cash distribution $25,500
PE 12–6A
a. Min’s equity prior to liquidation $ 120,000
Realization of asset sales $ 60,000
Book value of assets 320,000*
Loss on liquidation $ 260,000
Min’s share of loss (50% × $260,000) (130,000)
Min’s deficiency $ (10,000)
*$120,000 + $200,000
b. $60,000. $200,000 – $130,000 share of loss – $10,000 Min deficiency, also equals the amount realized from asset sales.
PE 12–6B
a. Murphy’s equity prior to liquidation $ 30,000
Realization of asset sales $ 25,000
Book value of assets 100,000*
Loss on liquidation $ 75,000
Murphy’s share of loss (50% × $75,000) (37,500)
Murphy’s deficiency $ (7,500)
*$70,000 + $30,000
b. $25,000. $70,000 – $37,500 share of loss – $7,500 Murphy deficiency, also equals the amount realized from asset sales.
EXERCISES
Ex. 12–1
Cash 13,000
Accounts Receivable 130,000
Merchandise Inventory 84,700
Equipment 69,500
Allowance for Doubtful Accounts 10,200
Gwen Delk, Capital 287,000
Ex. 12–2
Cash 40,000
Accounts Receivable 75,000
Land 250,000
Equipment 21,000
Allowance for Doubtful Accounts 6,000
Accounts Payable 22,500
Notes Payable 65,000
Brandi Bonds, Capital 292,500
Ex. 12–3
Hassell Lawson
a. $ 100,000 $100,000
b. 150,000 50,000
c. 96,800 103,200
d. 90,000 110,000
e. 102,000 98,000
Details
Hassell Lawson Total
a. Net income (1:1) $ 100,000 $ 100,000 $200,000
b. Net income (3:1) $150,000 $ 50,000 $200,000
c. Interest allowance $ 36,000 $ 12,000 $ 48,000
Remaining income (2:3) 60,800 91,200 152,000
Net income $ 96,800 $ 103,200 $200,000
d. Salary allowance $ 50,000 $ 70,000 $120,000
Remaining income (1:1) 40,000 40,000 80,000
Net income $ 90,000 $ 110,000 $200,000
e. Interest allowance $ 36,000 $ 12,000 $ 48,000
Salary allowance 50,000 70,000 120,000
Remaining income (1:1) 16,000 16,000 32,000
Net income $ 102,000 $ 98,000 $200,000
Ex. 12–4
Hassell Lawson
a. $190,000 $190,000
b. 285,000 95,000
c. 168,800 211,200
d. 180,000 200,000
e. 192,000 188,000
Details
Hassell Lawson Total
a. Net income (1:1) $190,000 $190,000 $380,000
b. Net income (3:1) $285,000 $ 95,000 $380,000
c. Interest allowance $ 36,000 $ 12,000 $ 48,000
Remaining income (2:3) 132,800 199,200 332,000
Net income $168,800 $211,200 $380,000
d. Salary allowance $ 50,000 $ 70,000 $120,000
Remaining income (1:1) 130,000 130,000 260,000
Net income $180,000 $200,000 $380,000
e. Interest allowance $ 36,000 $ 12,000 $ 48,000
Salary allowance 50,000 70,000 120,000
Remaining income (1:1) 106,000 106,000 212,000
Net income $192,000 $188,000 $380,000
Ex. 12–5
Casey Logan
Fisher Baylor Total
Salary allowances $ 40,000 $ 35,000 $ 75,000
Remainder (net loss, $20,000 plus $75,000
salary allowances) divided equally (47,500) (47,500) (95,000)
Net loss $ (7,500) $ (12,500) $(20,000)
Ex. 12–6
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. 12–7
a.
Net income: $188,000
Bowman Mapes Total
Salary allowance $ 75,000 $60,000 $135,000
Remaining income 31,800 21,200 53,000
Net income $106,800 $81,200 $188,000
Bowman remaining income: ($188,000 – $135,000) × 3/5
Mapes remaining income: ($188,000 – $135,000) × 2/5
b.
(1)
Income Summary 188,000
B. Bowman, Member Equity 106,800
S. Mapes, Member Equity 81,200
(2)
B. Bowman, Member Equity 75,000
S. Mapes, Member Equity 60,000
B. Bowman, Drawing 75,000
S. Mapes, Drawing 60,000
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. 12–8
a.
Daily Sun
WYXT Lindsey Newspaper,
Partners Wilson LLC Total
Salary allowance $115,600 $115,600
Interest allowance $ 24,0001 6,0002 $ 14,4003 44,400
Remaining income (4:3:3) 196,000 147,000 147,000 490,000
Net income $220,000 $268,600 $161,400 $650,000
112% × $200,000
212% × $50,000
312% × $120,000
b.
Dec. 31, 2010 Income Summary 650,000
WYXT Partners, Member Equity 220,000
Lindsey Wilson, Member Equity 268,600
Daily Sun Newspaper, LLC, Member
Equity 161,400
Dec. 31, 2010 WYXT Partners, Member Equity 24,000
Lindsey Wilson, Member Equity 121,600
Daily Sun Newspaper, LLC, Member Equity 14,400
WYXT Partners, Drawing 24,000
Lindsey Wilson, Drawing 121,600
Daily Sun Newspaper, LLC, Drawing 14,400
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 $ 370,000
Additional investment during the year 50,000 50,000
$250,000 $ 50,000 $120,000 $ 420,000
Net income for the year 220,000 268,600 161,400 650,000
$470,000 $318,600 $281,400 $1,070,000
Withdrawals during the year 24,000 121,600 14,400 160,000
Members’ equity, December 31, 2010 $446,000 $197,000 $267,000 $ 910,000
Ex 12–9
a.
Jan. 31 Partner, Drawing 30,000,000
Cash 30,000,000
b.
Dec. 31 Income Summary 400,000,000
Partner, Capital 400,000,000
c.
Dec. 31 Partner, Capital 360,000,000*
Partner, Drawing 360,000,000
*12 months × £30 million
Ex. 12–10
a. and b.
Lia Wu, Capital 50,000
Kara Oliver, Capital 50,000
$150,000 × 1/3
Note: The sale to Oliver is not a transaction of the partnership; so, the sales price is not considered in this journal entry.
Ex. 12–11
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.
Ex. 12–12
a. (1) Brad Hughes, Capital (20% × $120,000) 24,000
Mitchell Isaacs, Capital (25% × $100,000) 25,000
Leah Craft, Capital 49,000
(2) Cash 50,000
Jayme Clark, Capital 50,000
b. Brad Hughes ($120,000 – $24,000) 96,000
Mitchell Isaacs ($100,000 – $25,000) 75,000
Leah Craft 49,000
Jayme Clark 50,000
Ex. 12–13
a. Cash 45,000
Travis Harris, Capital 7,500
Keelyn Kidd, Capital 7,500
Felix Flores, Capital 60,000
b. Travis Harris 52,500
Keelyn Kidd 82,500
Felix Flores 60,000
Ex. 12–14
a. Medical Equipment 25,000
Douglass, Member Equity 10,0001
Finn, Member Equity 15,0002
1$25,000 × 2/5 = $10,000
2$25,000 × 3/5 = $15,000
b. (1) Cash 310,000
Douglass, Member Equity 22,000
Finn, Member Equity 33,000
Koster, Member Equity 255,000
Supporting calculations for the bonus:
Equity of Douglass $250,000
Equity of Finn 290,000
Contribution by Koster 310,000
Total equity after admitting Koster $850,000
Koster’s equity interest after admission × 30%
Koster’s equity after admission $255,000
Contribution by Koster $310,000
Koster’s equity after admission 255,000
Bonus paid to Douglass and Finn $ 55,000
Douglass: $55,000 × 2/5 = $22,000
Finn: $55,000 × 3/5 = $33,000
b. (2) Cash 160,000
Douglass, Member Equity 6,000
Finn, Member Equity 9,000
Koster, Member Equity 175,000
Supporting calculations for the bonus:
Equity of Douglass $250,000
Equity of Finn 290,000
Contribution by Koster 160,000
Total equity after admitting Koster $700,000
Koster’s equity interest after admission × 25%
Koster’s equity after admission $175,000
Contribution by Koster 160,000
Bonus paid to Koster $ 15,000
Douglass: $15,000 × 2/5 = $6,000
Finn: $15,000 × 3/5 = $9,000
Ex. 12–15
a. J. Taylor, Capital 4,000
K. Garcia, Capital 4,000
Equipment 8,000
b. (1) Cash 50,000
J. Taylor, Capital 3,100
K. Garcia, Capital 3,100
L. Harris, Capital 56,200
Supporting calculations for the bonus:
Equity of Taylor $ 96,000
Equity of Garcia 135,000