Partnerships

Ch 3
formation, operation
and changes in
membership
 Nature of the partnership entity
Partnership
The associations of 2 or more persons to carry on as co-owners
of a business for profit form a partnership.

Formation of Partnership, includes :

1. The name of the partnership and the name of partners.
2. The type of business to be conducted by the partnership and
duration of the partnership agreement.
3. The initial and method capital for capital contribution.
4. Complete specification of the profit and loss contribution.
5. Procedure used for changes in partnership.
6. Other aspects of operation the partner decide on.
 Characteristic of Partnerships
1. Partnership agreement.
2. Partnership as a separate entity.
3. Partner is agent of the partnership.
4. Statement of partnership authority.
5. Partner’s liability is joint and several.
6. Partners rights and duties.
7. Partner’s transferable interest in the partnership.
8. Partners dissociation.
TYPE OF LIMITED PARTNERSHIPS
1. Limited Partnerships
2. Limited Liability Partnerships
3. Limited Liability Limited Partnerships
Accounting for the formation of a partnership:
Illustrations :
A Comp. balance sheet dec 31, 2018
Cash 3,000 Liabilities 10,000
Inventory 7,000 A, Capital 15,000
Equipment 20,000
Accum. Depr. (5,000)
Total 25,000 Total 25,000

A and B prepare and sign a partnership includes all

significant operating policies. B will contribute $10.000 cash.
Based on audit, disclose that $ 1.000 of liabilities has not
been recorded, inventory market value $9.000 & equipment
fair value of $19.000.
Cash 13.000
Inventory 9.000
Equipment 19.000
Liabilities 11.000
A, Capital 60% 20.000
B, Capital 40% 10.000

Other transactions for current years :

1. Cash Withdrawal by B, $ 3.000
2. Partnerships lend money to A $ 4.000

B, Drawing 3.000
Cash 3.000

Cash 4.000
Loan payable to A 4.000
Allocating profit or loss to partners
Most partnerships use one or more of the
following distribution methods :

1. Arbitrary Profit Sharing Ratio.

2. Interest of Capital Balances.
3. Salaries to Partners.
4. Bonuses to Partners.
 Allocating profit or loss to partner
Illustration 2 :
During the current period, AB Partnership earns $45.000
revenue and incurs $35.000 in expenses, and Leaving
profit of $10.000 for the year 2018.
P artner B investment during in 2011
Date Dr Cr B alance
Jan 1 10,000
M ay 1 3,000 7,000
Sep 1 500 7,500
No v 1 1,000 6,500
Dec 31 6,500

The debit of $3.000 and $1.000 are recorded in B drawing

account.
Arbitratry Profit Sharing
A B Total
Profit Sharing 60% 40% 100%
Net Income 10,000
Alocated 6,000 4,000 (10,000)
Total 6,000 4,000 -

Revenue 45.000
Expenses 35.000
Income Summary 10.000
B, Capital 4.000
B, Drawing 4.000
Income Summary 10.000
A, Capital 6.000
B, Capital 4.000
 Profit Allocation
Add information :
Interest On Capital B alance
P artner B investment during in 2018
Date Dr Cr B alance
Jan 1 10,000
M ay 1 3,000 7,000
Sep 1 500 7,500
No v 1 1,000 6,500
Dec 31 6,500
Interest Rate 15%

Income Summary 10.000

A, Capital 6.480
B, Capital 3.520
Interest on Capital Balance
Date Dr Cr Balance Period $ Balance
Jan 1 10.000 4 40.000
May 1 3.000 7.000 4 28.000
Sep 1 500 7.500 2 15.000
Nov 1 1.000 6.500 2 13.000
Dec 31 6.500 -
Total 12 96.000
Average Capital 8.000

A B Total
Prof it % 60% 40% 100%
Av erage Capital 20.000 8.000
Net Income 10.000
Interest Rate 3.000 1.200 (4.200)
5.800
Alocated Income 3.480 2.320 (5.800)
Total 6.480 3.520 -
 Profit Allocation

A greement Salaries : A = $ 2,000 B = $ 5,000

Salaries
A B To tal
P ro fit % 60% 40% 100%
Net Inco me 10,000
Salary 2,000 5,000 (7,000)
3,000
A lo cated Inco me 1,800 1,200 (3,000)
To tal 3,800 6,200 -

Income Summary 10.000

A, Capital 3.800
B, Capital 6.200
 Profit Allocation

B o nus to P artner : 10% o f Inco me in excess $ 5.000

to B
B o nus
A B To tal
P ro fit % 60% 40% 100%
Net Inco me 10,000
B o nus to P artner - 500 (500)
9,500
A lo cated Inco me 5,700 3,800 (9,500)
To tal 5,700 4,300 -

Income Summary 10.000

A, Capital 5.700
B, Capital 4.300
 Profit Allocation
Interest Rate 15%
Salaries A : $ 2,000 B : $ 5,000
B o nus 10% paid to B exceed $ 5.000
M ultiple B ase o f P ro fit
A B To tal
P ro fit % 60% 40% 100%
20,000 8,000
Net Inco me 10,000
1 Interest Rate 15% 3,000 1,200 (4,200)
5,800
2 Salaries 2,000 5,000 (7,000)
To tal (1,200)
3 B o nus 500 (500)
(1,700)
4 A lo cate inco me (1,020) (680) (1,700)
To tal 3,980 6,020 -

Income Summary 10.000

A, Capital 3.980
B, Capital 6.020
 AB Partnership
Statement of Partner's Capital
Dec 31, 2018
A B Total
Balance Jan1, 2018 20,000 10,000 30,000
Add Investment - 500 500
Net Income 3,980 6,020 10,000
23,980 16,520 40,500
Withdrawal - (4,000) (4,000)
Balance Dec 31, 2018 23,980 12,520 36,500
 Changes in membership
A. New partner purchases an interest

Illustration :

1. On Jan 1 2019 A & B invite C to become partner, A contribute

$20,000 & B contribute $10,000.
2. C will be entitled to a 25% in the profits or losses of the
partnership.

A Capital 5.000
B Capital 2.500
C Capital 7.500
 Changes in membership

Recognizing fair value increases in partnership’s net assets

Illustration :

1. On Jan 1, 2019, A & B is an partnership with contributes 60 : 40.

2. A&B invite C to become partners with contributes capital 25%.
3. The partnership A & B has land that is undervalued by $6.000.
4. C purchases ¼ interest in the partnership capital directly from A
& B for a total cost $9.000, paying $5.900 to A & $3.100 to B.
A Capital 5.000
B Capital 2.500
C Capital 7.500

Land 6.000
A Capital 3.600
B Capital 2.400

A Capital 5.900
B Capital 3.100
C Capital 9.000
 Changes in membership
B. New partner invests in partnership
Illustration :
1. On Jan 1, 2019, Capital of the AB Partnership is $30.000.
A, $20.000 and B, $10.000.
2. C is invited into the partnership. C will have ¼ capital and 25%
share of profits.

Case 1. C invest $10.000.

Cash 10.000
C Capital 10.000

Total Resulting Capital : 40.000

 Changes in membership
Case 2a. :
C invest $11.000. The partnership A&B has land or (goodwill) that is
undervalued by $3.000.
Land / (goodwill) 3.000
A Capital 1.800
B Capital 1.200
Cash 11.000
C Capital 11.000
Total Resulting Net Asset/Capital : 44.000
Case 2b. :
C invest $11.000, as a bonus.
Cash 11.000
A Capital 450
B Capital 300
C Capital 10.250
Total Resulting Capital : 41.000
 Changes in membership
Case 3a. :
C invest $8.000. The partnership A&B has equipment for current
production $14.000, but has a fair value $8.000.
A Capital 3.600
B Capital 2.400
Equipment 6.000
Cash 8.000
C Capital 8.000
Total Resulting Capital : 32.000
Case 3b. :
C invest $8.000. A & B agree that given C goodwill $2.000.
Cash 8.000
Goodwill 2.000
C Capital 10.000
Total Resulting Capital : 40.000
 Changes in membership
Case 3c. :
C invest $9.500 including $1.500 for bonuses.

Cash 8.000
A Capital 900
B Capital 600
C. Capital 9.500

Total Resulting Capital : 38.000

 Determining a new Partner’s Investment cost
ILLUSTRATION:
On Jan 1, 13 Capital of the AB Partnership is $30.000. A, $20.000 and
B, $10.000. C invest $11.000 and A & B agree to give C a bonus of
$1.500 for joining the partnership.

Prior capital of A&B 30.000

Less bonus to C (1.500)
Capital retained A & B 28.500

Total Resulting Capital 38.000

Less prior partner capital 28.500
9.500
Less bonus to C (1.500)
Cash contribution new partner 8.000
 Dissociation of a partner from the partnership

Illustration :
A retires from partnership ABC. All partners agree to buyout price
when his capital account $55.000. Partnership A : 45%, B : 30%, C :
25%.
A Capital 55.000
Cash 55.000

If buyout price $65.000.

A Capital 55.000
B Capital 5.500
C Capital 4.500
Cash 65.000
If buyout price $65.000 and goodwill $10.000?
If buyout price $45.000?
finish