Chapter 12 Accounting for Partnerships and Limited Liability Companies ...

Chapter 12 Accounting for Partnerships and Limited Liability Companies Study Guide

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Learning Objective 1: Describe the characteristics of proprietorships, partnerships, and limited liability companies.

The characteristics of the various legal forms of a business? (See exercises 1?3)

Learning Objective 2: Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership.

The journal entry used to record the contributions in forming a partnership? (See

exercises 4?6)

How to divide net income based on the services provided by partners and record the

division? (See exercises 7?9)

How to divide a partnership's net income based on the interest on capital balances of

each partner and how to record the division? (See exercises 10?12)

The accounting treatment if net income is less than the total of allowances? (See

exercises 13?15) Learning Objective 3: Describe and illustrate the accounting for partner admission and withdrawal.

How to record the admission of a new partner who purchases an interest from existing

partners? (See exercises 16?18)

How to record the admission of a new partner who contributes assets to the

partnership? (See exercises 19?21)

The journal entry used for the revaluation of assets before a new partner is admitted?

(See exercises 22?24)

How to calculate and record a bonus when admitting a new partner? (See exercises

25?27)

The accounting treatment for the withdrawal and death of a partner? (See exercises

28?30)

1

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2 Chapter 12

Learning Objective 4: Describe and illustrate the accounting for liquidating a partnership.

The steps in partnership liquidation when there is a gain on realization? (See exercises

31, 34, and 37)

The steps in partnership liquidation when there is a loss on realization? (See exercises

32, 35, and 38)

The steps in partnership liquidation when there is a loss on realization that results in a

capital deficiency? (See exercises 33, 36, and 39)

The journal entries to record the liquidation of a partnership? (See exercises 40?42)

Learning Objective 5: Prepare the statement of partnership equity.

How to prepare a statement of partnership equity? (See exercises 43?45)

Learning Objective 6: Analyze and interpret employee efficiency.

How to calculate and interpret the revenue per employee? (See exercises 46?48)

Fill-in-the-Blank Equations

1. Beginning capital + Capital additions + __________ ? Partner withdrawals = Ending capital

2. __________ = Revenue/Number of employees

Exercises

1. Wyatt Parks would like to form a business but is unsure which legal form would be best for him. He would like to have limited liability against creditor claims if the business does not succeed. If the company is successful, Parks does not want the life of the business to be limited to his lifetime. What type of legal form would best fit his needs?

2. Michael Bryan is looking to develop a new company. Bryan believes that the company will be unsuccessful at first, so he prefers the net income or loss to pass through to his personal tax return for taxation. He does not have any business associates, so he will be forming the business alone. What type of legal form would best fit his needs?

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Accounting for Partnerships and Limited Liability Companies 3

3. Determine if each description is related to a proprietorship, partnership, or limited liability company. a. A business has unlimited legal liability, but the life and funds are limited to its multiple owners. b. A business is simple to form, has pass-through taxation, and has no limitation on legal liability for its owner. c. A business has limited legal liability and has an unlimited life, but is moderately complex to form.

4. Jonathan Meyers contributes the following items to his newly formed partnership: Cash, $475; Equipment, $1,300; Accounts Payable, $200; and Inventory, $650. Prepare the journal entry to record his contribution on August 1, 20Y5.

5. Jack L. and Matthew C. would like to combine businesses to form a partnership. Jack contributes the following: Building, $7,950; Notes Payable on the building, $2,150; and Inventory, $790. Matthew contributes $1,200 of Accounts Receivable, which has an Allowance for Doubtful Accounts of $250. Matthew also contributes $970 of cash. Prepare the journal entry to record the contributions, which occur on August 21, 20Y5.

6. Owen Dillard and Ryan Keller are looking to form a new partnership. Dillard contributes the following to the partnership: Equipment, $875; Building, $6,790; Notes Payable, $2,100; and Cash, $260. Keller contributes the following: Accounts Receivable, $900 with an allowance for doubtful accounts of $160; Inventory, $675; Cash, $125; and Accounts Payable, $250. Prepare the journal entry to record the partners' contributions on September 1, 20Y5.

7. Kelly R. and Rose C. formed a partnership in the previous year. In the agreement, each partner promises to perform services for the partnership. Kelly R. receives a $3,500 monthly salary, while Rose C. receives a $4,000 monthly salary. For the fiscal year ending on September 30, 20Y5, the partnership earned a net income of $247,000 made up of revenues of $600,000 and expenses of $353,000. If the partnership income is divided among partners based on services provided, determine the amount allocated to each partner. Any remaining income after the annual salary is divided equally. Also, prepare the journal entry to record the division of net income.

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4 Chapter 12

8. Ashley F. and Charles K.'s partnership earns $300,000 of net income for the 20Y5 fiscal year ending March 31, 20Y5. Revenues totaled $750,000 and expenses totaled $450,000. The partnership agreement states that net income should be allocated to partners according to the services provided to the partnership, with any remaining net income also allocated according to the contributions of services provided. Ashley F. receives a $5,200 monthly allowance, while Charles K. receives a $5,750 monthly allowance. Determine the amount allocated to each partner and prepare the journal entry to record the division of net income. Round percentages and answers to two decimal places.

9. JJ&T Partnership has three partners, James Small, Josh Platt, and Turner Lyle, who allocate net income according to the services provided and any remainder equally. The partnership agreement states that James and Turner will provide services for $2,500 a month while Josh will provide services for $3,750. For the fiscal year ending December 31, 20Y5, the partnership earned $192,600 based on revenues of $400,000 and expenses of $207,400. Determine the amount allocated to each partner and prepare the journal entry to record the division of net income.

10. Assume that K&R Associates divides income based on salary allowances and 15% interest on the capital balances of each partner (Kelly R. and Rose C.), with any remaining net income allocated equally. For the March 31, 20Y6, fiscal year, determine the amount allocated to each partner using the information below if the partnership earned $175,000.

Monthly Salary Allowance Capital Balance on April 1, 20Y5

Kelly R.

$2,200

$135,400

Rose C.

2,750

110,800

11. Jack L. and Matthew C.'s partnership agreement states that net income will be allocated based on salary allowances and interest on the partners' capital balances at a 20% rate. Any remaining net income will be allocated based on the weighting of the capital balances. For the 20Y5 fiscal year, determine the amount of the partnership's $180,000 income allocated to each partner using the information below. Round the weights of capital balances to the nearest whole percentage.

Monthly Salary Allowance Capital Balance on January 1, 20Y5

Jack L.

$4,100

$175,000

Matthew C.

2,200

147,500

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Accounting for Partnerships and Limited Liability Companies 5

12. Wyatt Parks and Michael Burns form a partnership, Parks & Burns, which earns net income of $110,000 for the 20Y5 fiscal year. The partners agree to allocate net income based on salary allowances, interest on their capital balances at a 10% rate, and any remainder equally. Use the information below to determine the amount of net income allocated to each partner.

Monthly Salary Allowance Capital Balance on January 1, 20Y5

Wyatt Parks

$1,750

$100,000

Michael Burns

1,950

97,500

13. Assume the same information as in Exercise 10, except that the partnership's net income is $92,000 rather than $175,000. Determine the amount of income allocated to each partner.

14. Assume the same information as in Exercise 12, except that the partnership's net income is $50,000, rather than $110,000. Determine the amount of income that will be allocated to each partner.

15. Assume the same information as in Exercise 9, except that the partnership's net income is $99,000, rather than $192,600. Determine the amount of income that will be allocated to each partner.

16. On October 1, 20Y5, Ryan T. becomes a partner in an existing partnership with Marie C., and Jonathan L. Ryan purchases of each existing partner's interest. Prior to the transaction, Marie's capital account had a balance of $72,000, while Jonathan's had a balance of $66,000. Prepare the journal entry to record the transaction and determine the account balances of each partner's capital account afterwards.

17. On September 15, 20Y5, Alex M. purchases interest in a partnership from Taylor P. and Thomas K. Alex purchases of Taylor's $33,000 partnership interest and of Thomas's $100,000 partnership interest. Prepare the journal entry to record the transaction. Also, determine each partner's interest afterwards, rounding to the nearest whole percentage.

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6 Chapter 12

18. Laura B. becomes a partner in the J&J Partnership on November 1, 20Y5, by purchasing an interest from the existing partners. Laura purchases ? of James G.'s $50,000 interest and ? of Josh T.'s $90,000 interest. Prepare the journal entry to record the transaction. Also, determine each partner's capital account balance after the admittance of the new partner.

19. On October 1, 20Y5, Ryan T. becomes a partner in an existing partnership by contributing equipment that has a value of $54,000. Prepare the journal entry to record the admittance of the new partner. What effect does the transaction have on the partnership's net assets and owners' equity?

20. In exchange for interest in an existing partnership, Cody L. contributes a building worth $75,000 to the partnership. Cody also contributes a $16,000 note payable for the building to the partnership. Prepare the journal entry to record Cody L.'s admittance on January 3, 20Y5. Also, determine the effect of the transaction on the company's balance sheet.

21. Regan T. becomes a partner in an existing partnership by contributing cash of $10,000 and inventory worth $12,000 to the partnership on March 5, 20Y5. Prepare the journal entry to record the transaction and determine the effect on the partnership's net assets and owners' equity.

22. Before admitting a new partner into the partnership on June 15, 20Y5, the account balance of Merchandise Inventory shows a balance of $19,200. The cost to replace the merchandise inventory would be $21,600. Record the revaluation of the asset and effect on the two existing partners, Jill A. and Sarah M., who share net income equally.

23. A new partner will be admitted to the L&P Partnership on May 5, 20Y5. On this date, a long-term investment has an account balance of $41,750, but is currently worth $52,250. The partners, Lucy H. and Peter T., share net income using a ratio of 3:2. Prepare the journal entry to record the asset revaluation prior to the admittance of the new partner.

24. Prior to admitting a new partner into Terry & Teri Associates, the company has Merchandise Inventory with an account balance of $1,500 and Equipment with an account balance of $4,200. The current cost to replace the inventory would be $1,150, while the equipment has a current value of $4,800. The partners, Adam Terry and Teri Smith, share net income equally. Prepare the journal entry to record the asset revaluations on March 4, 20Y5.

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Accounting for Partnerships and Limited Liability Companies 7

25. Taylor Robertson and Robert Samson would like to admit Mary Taylor as a new partner to their existing partnership. Mary will receive a interest in the partnership and will share equally with the existing partners the income and loss of the partnership. Taylor Robertson currently has a capital account balance of $28,000, while Robert Samson has a capital account balance of $25,000. Mary Taylor plans to pay $22,000 in cash for the interest. Calculate the bonus paid and prepare the journal entry to record the admittance of the new partner, which occurs on July 10, 20Y5.

26. Prior to admitting a new partner on March 15, 20Y5, Bell and Smith have capital account balances of $54,000 and $60,000, respectively. The new partner, Hughes, plans to contribute equipment worth $42,000 for a ? partnership interest. He will share partnership income and losses equally with the existing partners. Calculate the bonus paid and prepare the journal entry to record the admittance of the new partner.

27. Nix and Goodman share partnership income and losses according to a 3:1 ratio. Prior to admitting a new partner, Nix's capital account has a balance of $61,500, while Goodman's capital account has a balance of $89,400. The new partner, Lee, agrees to pay $50,000 in cash for a 20% partnership interest. Determine the amount of the partner bonus and which partner(s) will receive the bonus. Prepare the journal entry to record the admittance of the new partner on August 25, 20Y5.

28. Terry is retiring from being a partner in Terry & Teri Associates. Terry's capital account balance before the retirement equals $51,500. The other existing partners, Smith and Rowling, agree to each buy half of Terry's capital account and continue the business. Prepare the journal entry to record Terry's retirement on December 31, 20Y5.

29. Instead of the existing partners purchasing Terry's partnership interest in Exercise 28, the partnership pays for his partnership interest using $32,500 in cash and $19,000 of equipment, which has a replacement cost equal to its current account balance on the partnership's balance sheet. Prepare the journal entry to record Terry's retirement on December 31, 20Y5.

30. Assume that the partner from Exercise 28 dies on December 16, 20Y5, rather than retiring from the partnership. The partnership has a calendar year-end and increases assets by $4,200 upon revaluation. The partnership has net income of $54,000 from the beginning of the fiscal year to December 16, 20Y5. The partnership earns an additional $8,600 from December 17, 20Y5, to December 31, 20Y5. If the partnership allocates net income and losses among Terry and the other partner according to a 5:1 ratio, how much will the partnership owe to Terry's estate?

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8 Chapter 12

31. Prior to liquidation, Hill & Parks prepared the simplified trial balance below. The partners, Hill and Parks, share income and losses in a ratio of 3:2. Upon liquidation on December 31, 20Y5, the partnership sells all noncash assets for $72,000. Prepare a statement of partnership liquidation showing all steps the partnership will take upon liquidation.

Hill & Parks

Post-Closing Trial Balance

December 1, 20Y5

Debit

Credit

Balances

Balances

Cash

32,400

Noncash Assets 70,200

Liabilities

43,700

Hill, Capital

29,400

Parks, Capital

29,500

102,600

102,600

32. Assume the same information as in Exercise 31, except that the partnership sells the noncash assets at a loss for $68,000 on December 31, 20Y5. Prepare the statement of partnership liquidation.

33. Using the same information as in Exercise 31, assume the noncash assets are sold at a larger loss for $15,000 in cash. Prepare the statement of partnership liquidation and determine how much each partner must contribute for any deficiencies.

34. On March 15, 20Y5, the J&T Partnership decided to liquidate and ceased operations. On this date, the company prepared the following simplified trial balance. Upon liquidation on April 30, 20Y5, the noncash assets were sold for $26,200. Assuming that the partners, Jolly and Topsy, share income and losses 3:1, prepare a statement of partnership liquidation.

J&T Partnership

Post-Closing Trial Balance

March 15, 20Y5 Debit

Balances

Credit Balances

Cash

67,300

Noncash Assets

22,400

Liabilities

18,750

Jolly, Capital

39,400

Topsy, Capital

31,550

89,700

89,700

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