You are on page 1of 37

WILEY

IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College

F-1

APPENDIX PREVIEW
In this appendix, we discuss reasons why businesses select
the partnership form of organization. We also explain the
major issues in accounting for partnerships.

Financial Accounting
IFRS 3rd Edition
Weygandt Kimmel Kieso
F-2

APPENDIX

Accounting for
Partnerships

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the characteristics of the partnership form of business
organization.
2. Explain the accounting entries for the formation of a partnership.
3. Identify the bases for dividing net income or net loss.
4. Describe the form and content of partnership financial statements.
5. Explain the effects of the entries to record the liquidation of a
partnership.

F-3

Partnership Form of Organization


Partnership: An association of two or
more persons to carry on as co-owners
of a business for profit.

Learning Objective
1
Identify the
characteristics of the
partnership form of
business organization.

Type of Business:

F-4

Small retail, service, or manufacturing companies.

Accountants, lawyers, and doctors.

LO 1

Characteristics of Partnerships
ASSOCIATION OF INDIVIDUALS

Legal entity.

Accounting entity.

Net income not taxed as a separate entity.

MUTUAL AGENCY

F-5

Act of any partner is binding on all other partners, so long


as the act appears to be appropriate for the partnership.

LO 1

Characteristics of Partnerships
LIMITED LIFE

Dissolution occurs whenever a partner withdraws or a


new partner is admitted.

Dissolution does not mean the business ends.

UNLIMITED LIABILITY

F-6

Each partner is personally and individually liable for all


partnership liabilities.

LO 1

Characteristics of Partnerships
CO-OWNERSHIP OF PROPERTY

F-7

Each partner has a claim on total assets.

This claim does not attach to specific assets.

All net income or net loss is shared equally by the


partners, unless otherwise stated in the partnership
agreement.

LO 1

Organizations with Partnership


Characteristics
Special partnership forms are:
1. LIMITED PARTNERSHIPS,
2. LIMITED LIABILITY PARTNERSHIPS,
3. LIMITED LIABILITY COMPANIES, and
4. S CORPORATIONS.

Illustration F-2
Advantages and disadvantages of a partnership
F-8

LO 1

The Partnership Agreement


Should specify relationships among the partners:
1. Names and capital contributions of partners.
2. Rights and duties of partners.
3. Basis for sharing net income or net loss.
4. Provision for withdrawals of assets.
5. Procedures for submitting disputes to arbitration.
6. Procedures for the withdrawal or addition of a partner.
7. Rights and duties of surviving partners in the event of a
partners death.

F-9

LO 1

Basic Partnership Accounting


Forming a Partnership

Learning Objective 2
Explain the accounting entries
for the formation of a
partnership.

Illustration: A. Rolfe and T. Shea combine their proprietorships to


start a partnership named U.K. Software. The firm will specialize in
developing financial modeling software packages. Rolfe and Shea
have the following assets prior to the formation of the partnership.

F-10

Illustration F-3
Book and fair values of assets invested

LO 2

Forming a Partnership

Illustration F-3
Book and fair values
of assets invested

Prepare the entry to record the investment of A. Rolfe.


Cash

8,000

Equipment

4,000

A. Rolfe, Capital
F-11

12,000
LO 2

Forming a Partnership

Illustration F-3
Book and fair values
of assets invested

Prepare the entry to record the investment of T. Shea.


Cash

9,000

Accounts Receivable

4,000

Allowance for Doubtful Accounts


F-12

T. Shea, Capital

12,000

1,000
LO 2

Dividing Net Income or Net Loss


Partners equally share net income or net loss
unless the partnership contract indicates otherwise.
CLOSING ENTRIES:

Learning
Objective 3
Identify the bases
for dividing net
income or net
loss.

1. Debit each revenue account for its balance, and credit Income
Summary for total revenues. Debit Income Summary for total
expenses, and credit each expense account for its balance.
2. Debit Income Summary for its balance, and credit each partners
capital account for his or her share of net income. Or, credit
Income Summary, and debit each partners capital account for
his or her share of net loss.
3. Debit each partners capital account for the balance in that
partners drawing account, and credit each partners drawing
account for the same amount.
F-13

LO 3

Dividing Net Income or Net Loss


Illustration: AB Company has net income of 32,000 for 2017. The
partners, L. Arbor and D. Barnett, share net income and net loss
equally. Drawings for the year were Arbor 8,000 and Barnett
6,000. The last two closing entries are:

F-14

LO 3

Dividing Net Income or Net Loss


Assume that the beginning capital balance is 47,000 for Arbor and
36,000 for Barnett. The capital and drawing accounts will show
the following after posting the closing entries.

Illustration F-4
Partners capital and drawing accounts after closing

F-15

LO 3

Dividing Net Income or Net Loss


INCOME RATIOS
Partnership agreement should specify the basis for sharing net
income or net loss. Typical income ratios:

F-16

Fixed ratio.

Ratio based on capital balances.

Salaries to partners and remainder on a fixed ratio.

Interest on partners capital balances and the remainder on a


fixed ratio.

Salaries to partners, interest on partners capital, and the


remainder on a fixed ratio.
LO 3

Dividing Net Income or Net Loss


Illustration: Sara King and Ray Lee are copartners in Kingslee
Company. The partnership agreement provides for (1) salary
allowances of 8,400 to King and 6,000 to Lee, (2) interest
allowances of 10% on capital balances at the beginning of the
year, and (3) dividing the remainder equally. Capital balances on
January 1 were King 28,000, and Lee 24,000. In 2017,
partnership net income is 22,000.
Prepare a schedule showing the distribution of net income.

F-17

LO 3

Dividing Net Income or Net Loss

Illustration F-5
Income statement with division of net income
F-18

LO 3

Dividing Net Income or Net Loss


Journalize the allocation of net income in each of the situations
above.
Dec. 31 Income Summary

22,000

Sara King, Capital


Ray Lee, Capital
12,400
9,600

F-19

LO 3

Dividing Net Income or Net Loss


Illustration: Assume Kingslees net income is only 18,000.

Illustration F-6
Division of net incomeincome deficiency

F-20

LO 3

Learning Objective
4

Partnership Financial Statements

Describe the form and


content of partnership
financial statements.

Illustration F-7
Partners capital statement
F-21

LO 4

Partnership Financial Statements

Illustration F-8
Equity section of a
partnership statement
of financial position

The income statement for a partnership is identical to the income


statement for a proprietorship, except for the division of net
income.
F-22

LO 4

Liquidation of a Partnership
Ends both the legal and economic life
of the entity.

Learning Objective 5
Explain the effects of the
entries to record the liquidation
of a partnership.

In liquidation, sale of non-cash assets for cash is called


realization. To liquidate, it is necessary to:
1. Sell non-cash assets for cash and recognize a gain or loss on
realization.
2. Allocate gain/loss on realization to the partners based on their
income ratios.
3. Pay partnership liabilities in cash.
4. Distribute remaining cash to partners on the basis of their
capital balances.
F-23

LO 5

Liquidation of a Partnership
Illustration: Ace Company is liquidated when its ledger shows
the assets, liabilities, and equity accounts are reported as follows:

Illustration F-9
Account balances prior to liquidation

F-24

LO 5

Liquidation of a Partnership

No Capital
Deficiency

Illustration: Ace Company agree to liquidate the partnership on


the following terms. (1) The non-cash assets of the partnership will
be sold to Jackson Enterprises for 75,000 cash. (2) The
partnership will pay its partnership liabilities. The income ratios of
the partners are 3:2:1, respectively.
Step 1 - Record the realization of noncash assets.
Cash 75,000
Accumulated DepreciationEquipment
Accounts Receivable
15,000
Inventory
18,000
Equipment
35,000
Gain on Realization
15,000
F-25

8,000

LO 5

Liquidation of a Partnership

No Capital
Deficiency

Illustration: Ace Company agree to liquidate the partnership on


the following terms. (1) The non-cash assets of the partnership will
be sold to Jackson Enterprises for 75,000 cash. (2) The
partnership will pay its partnership liabilities. The income ratios of
the partners are 3:2:1, respectively.
Step 2 Allocate the gain to the partners.
Gain on Realization
15,000
R. Arnet, Capital (15,000 x 3/6)
P. Carey, Capital (15,000 x 2/6)
W. Eaton, Capital (15,000 x 1/6)

F-26

7,500
5,000
2,500

LO 5

Liquidation of a Partnership

No Capital
Deficiency

Illustration: Ace Company agree to liquidate the partnership on


the following terms. (1) The non-cash assets of the partnership will
be sold to Jackson Enterprises for 75,000 cash. (2) The
partnership will pay its partnership liabilities. The income ratios of
the partners are 3:2:1, respectively.
Step 3 Creditors are paid in full.
Notes Payable 15,000
Accounts Payable 16,000
Cash
31,000

F-27

LO 5

Liquidation of a Partnership

No Capital
Deficiency

Step 4 Record distribution of cash to the partners.

R. Arnet, Capital

22,500

P. Carey, Capital

22,800

Illustration F-10
Ledger balances before
distribution of cash

W. Eaton, Capital 3,700


Cash

49,000

Caution: Cash should not be distributed to partners on the basis of


their income-sharing ratios.
F-28

LO 5

Liquidation of a Partnership

No Capital
Deficiency

Some accountants prepare a SCHEDULE OF CASH PAYMENTS


to determine the distribution of cash to the partners.

Illustration F-11
Schedule of cash payments, no capital deficiency

F-29

LO 5

Liquidation of a Partnership

Capital
Deficiency

Illustration: Ace Company is on the brink of bankruptcy. The


partners decide to liquidate by having a going-out-of-business
sale. Merchandise is sold at substantial discounts, and the
equipment is sold at auction. Cash proceeds from these sales and
collections from customers total only 42,000.
Step 1 - Record the realization of non-cash assets.
Cash 42,000
Accumulated DepreciationEquipment
Loss on Realization
18,000
Accounts Receivable
15,000
Inventory
18,000
Equipment
35,000
F-30

8,000

LO 5

Liquidation of a Partnership

Capital
Deficiency

Illustration: Ace Company is on the brink of bankruptcy. The


partners decide to liquidate by having a going-out-of-business
sale. Merchandise is sold at substantial discounts, and the
equipment is sold at auction. Cash proceeds from these sales and
collections from customers total only 42,000.
Step 2 Allocate the loss to the partners.
R. Arnet, Capital (18,000 x 3/6) 9,000
P. Carey, Capital (18,000 x 2/6) 6,000
W. Eaton, Capital (18,000 x 1/6) 3,000
Loss on Realization
18,000

F-31

LO 5

Liquidation of a Partnership

Capital
Deficiency

Illustration: Ace Company is on the brink of bankruptcy. The


partners decide to liquidate by having a going-out-of-business
sale. Merchandise is sold at substantial discounts, and the
equipment is sold at auction. Cash proceeds from these sales and
collections from customers total only 42,000.
Step 3 Creditors are paid in full.
Notes Payable 15,000
Accounts Payable 16,000
Cash
31,000

F-32

LO 5

Liquidation of a Partnership

Capital
Deficiency

Step 4 Record distribution of cash to the partners.

The distribution of cash to the partners will vary


depending on how Eatons deficiency is settled.

Illustration F-12
Ledger balances
before distribution of
cash

Deficiency

PAYMENT OF DEFICIENCY
Cash 1,800
W. Eaton, Capital
F-33

1,800
LO 5

Liquidation of a Partnership

Capital
Deficiency

PAYMENT OF DEFICIENCY
Step 4 Record distribution of cash to the partners.

R. Arnet, Capital

6,000

P. Carey, Capital

11,800

Cash

F-34

Illustration F-13
Ledger balances after
paying capital deficiency

17,800

LO 5

Liquidation of a Partnership

Capital
Deficiency

Step 4 Record distribution of cash to the partners.

The distribution of cash to the partners will vary


depending on how Eatons deficiency is settled.

Illustration F-12
Ledger balances
before distribution of
cash

Deficiency

NON-PAYMENT OF DEFICIENCY
R. Arnet, Capital (1,800 x 3/5) 1,080
P. Carey, Capital (1,800 x 2/5) 720
W. Eaton, Capital
1,800
F-35

LO 5

Liquidation of a Partnership

Capital
Deficiency

NON-PAYMENT OF DEFICIENCY
Step 4 Record distribution of cash to the partners.

R. Arnet, Capital

4,920

P. Carey, Capital

11,080

Cash

F-36

Illustration F-14
Ledger balances after
nonpayment of capital
deficiency

16,000

LO 5

Copyright
Copyright 2016 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these programs
or from the use of the information contained herein.

F-37