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ANNOUNCEMENTS:
BELLRINGER:What are three of the ways income can be divided (allocated) between partners?
1. Stated Ratio2. 3.
What happens if there is no partnership agreement?
1. Plan to attend a review session.
2. The study guide and practice financial statement problem will be posted on D2L.
4. If your name is on the following list, please use your phone now to send Sid an RSVP email: [email protected]
If your name appears on this list, please stay.Madeleine Anderson Myia ShawCara Collier Logan StanlyMaeson Conlin Sharon StuartEmily Daughdrill Broderick TearsBrock Francis Saad HutarBriana HenryJoseph Kremer Edwar C.Kaitlynn McCormick Qi C.Christopher Mejia Courtney W.Meghan Miller Quinshawn C.Matthew Powers Mitchell B.Eugheni Cuzmin Ashley G.Benez Holmes Ryan H.
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Agenda:
Income Allocation Notes1. Stated Ratios2. Capital Balances3. Service, Capital, Stated Ratios
General Limited
Allocation on Capital Balances In their partnership agreement, Zayn and Perez agree to
allocate profits and losses on the basis of their beginning capital balances.
In their partnership agreement, Zayn and Perez agree to allocate profits and losses on the basis of their beginning capital balances.
Balance Ratio Income AllocationK. Zayn, Capital 30,000$ 75% 60,000$ 45,000$ H. Perez, Capital 10,000 25% 60,000 15,000 Totals 40,000$ 100% 60,000$
Dec 31 Income Summary 60,000 K. Zayn, Capital 45,000 H. Perez, Capital 15,000
To allocate income to partner's capital.
P 2
3rd Closing Entry:
Close ___ to ____.
Allocation on Services, Capital, and Stated Ratios
Zayn and Perez have a partnership agreement with the following conditions:
1.Zayn receives a $36,000 annual salary allowance and Perez receives an allowance of $24,000.
2.Each partner is allowed an annual interest allowance of 10% on their beginning capital balance.
3.Any remaining balance of income or loss is allocated equally.
Net income is $70,000.
P 2
Zayn Perez Remainder70,000$
36,000$ 24,000$ 10,000 3,000 1,000 6,000 3,000 3,000 -
42,000 28,000 Income to each partner
Net income
Income Allocation
SalariesInterestEqual allocation
Zayn Perez Remainder70,000$
36,000$ 24,000$ 10,000 3,000 1,000 6,000 3,000 3,000 -
42,000 28,000 Income to each partner
Net income
Income Allocation
SalariesInterestEqual allocation
Allocation on Services, Capital, and Stated Ratios
Zayn Perez Remainder70,000$
36,000$ 24,000$ 10,000 3,000 1,000 6,000 3,000 3,000 -
42,000 28,000 Income to each partner
Net income
Income Allocation
SalariesInterestEqual allocation
Zayn Perez Remainder70,000$
36,000$ 24,000$ 10,000 3,000 1,000 6,000 3,000 3,000 -
42,000 28,000
InterestEqual allocationIncome to each partner
Net income
Income Allocation
Salaries
$30,000 × 10% = $3,000$10,000 × 10% = $1,000 $30,000 × 10% = $3,000$10,000 × 10% = $1,000
P 2
$6,000 × ½ = $3,000$6,000 × ½ = $3,000
Zayn Perez Remainder50,000$
36,000$ 24,000$ (10,000) 3,000 1,000 (14,000) 3,000 3,000 (20,000)
42,000 28,000
InterestEqual allocationIncome to each partner
Net income
Income Allocation
Salaries
Zayn Perez Remainder50,000$
36,000$ 24,000$ (10,000) 3,000 1,000 (14,000) 3,000 3,000 (20,000)
42,000 28,000
InterestEqual allocationIncome to each partner
Net income
Income Allocation
Salaries
Allocation on Services, Capital, and Stated Ratios
Zayn Perez Remainder50,000$
36,000$ 24,000$ (10,000) 3,000 1,000 (14,000) 3,000 3,000 (20,000)
42,000 28,000
InterestEqual allocationIncome to each partner
Net income
Income Allocation
Salaries
Zayn Perez Remainder50,000$
36,000$ 24,000$ (10,000) 3,000 1,000 (14,000)
(7,000) (7,000) - 32,000 18,000 Income to each partner
Net income
Income Allocation
SalariesInterestEqual allocation
Now let’s assume that net income is only $50,000.
P 2
($14,000) × ½ = ($7,000)($14,000) × ½ = ($7,000)
Partnership Financial Statements
TotalBeginning capital balances -$ -$ -$ Investments by owners 30,000 10,000 40,000 Net income Salary allowances 36,000$ 24,000$ Interest allowances 3,000 1,000 Balance allocated 3,000 3,000 Total net income 42,000 28,000 70,000 Less partners' withdrawals (20,000) (12,000) (32,000) Ending capital balances 52,000$ 26,000$ 78,000$
Zayn Perez
BOARDSStatement of Partners' Equity
For the Year Ended December 31, 2013
During 2013, Zayn withdrew $20,000 cash from the partnership and Perez withdrew $12,000. Net income for the
year is $70,000.
P 2
E12-3 (Page 522)Complete on Notebook Paper on Overhead (Answer is on the Next Slide)
Distribute Chapter 12 Handout:
E12:4-5
What if Net Income is less than what is needed to cover salaries
and interest?
What if there is a Net Loss?
REMEMBER: We do this calculation so that we can
close INCOME SUMMARY to the correct CAPITAL
accounts.
1 Income Summary 98,800
Kramer, Capital 53,400
Knox, Capital 45,400
2 Kramer, Capital 4,400
Knox, Capital 12,400
Income Summary 16,800
BigPicture
Admission and Withdrawal of Partners When the makeup of the partnership changes, the
existing partnership is dissolved. A new partnership may be immediately formed. New partner acquires partnership interest by:
1. Purchasing it from the other partners, or2. Investing assets in the partnership.
P 3
Purchase of Partnership Interest• A new partner can purchase
partnership interest directly from the existing partners.
The cash goes to the partners, not to the partnership.
• To become a partner, the new partner must be accepted by the current partners.
P 3
Purchase of Partnership Interest On January 4th, Hector Perez sells one-half of his
partnership interest to Tyrell Rasheed for $18,000. Perez gives up a $13,000 recorded interest in the partnership.
Zayn Perez Rasheed TotalCapital balances before new partner 52,000$ 26,000$ -$ 78,000$ Allocation to new partner (13,000) 13,000 - Capital balances after new partner 52,000$ 13,000$ 13,000$ 78,000$
P 3
Investing Assets in a Partnership• The new partner can gain
partnership interest by contributing assets to the partnership.
• The new assets will increase the partnership’s net assets.
• After admission, both assets and equity will increase.
P 3
Investing Assets in a Partnership On January 4th, Tyrell Rasheed is admitted to the
partnership with a payment of $22,000 cash.
Zayn Perez Rasheed TotalCapital balances before new partner 52,000$ 26,000$ -$ 78,000$ Allocation to new partner 22,000 22,000 Capital balances after new partner 52,000$ 26,000$ 22,000$ 100,000$
P 3
Bonus to Old or New Partners
Bonus to Old Partners
When the current value of a partnership is greater than the recorded amounts of equity, the old partners usually require a
new partner to pay a bonus when joining.
Bonus to New Partners
The partnership may grant a bonus to a new partner if the business is in need of
cash or if the new partner has exceptional talents.
P 3
Bonus to Old Partners On January 4th, Zayn and Perez agree to accept Rasheed as a
partner upon his investment of $42,000 cash in the partnership. Rasheed is to receive a 25% ownership interest
in the new partnership. Any bonus is attributable to the existing partners and is shared equally.
78,000$ 42,000
120,000 25%
30,000$ Rasheed's equity balance
Equity of Zayn and Perez
Total partnership equityRasheed's ownership percent
Investment by Rasheed
P 3
Bonus to Old Partners
$42,000 - $30,000 = $12,000 × ½ = $6,000
P 3
On January 4th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $42,000 cash in the
partnership. Rasheed is to receive a 25% ownership interest in the new partnership. Any bonus is attributable to the
existing partners and is shared equally.
Bonus to New Partner
78,000$ 18,000 96,000
25%24,000$ Rasheed's equity balance
Equity of Zayn and Perez
Total partnership equityRasheed's ownership percent
Investment by Rasheed
On January 4th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $18,000 cash in the
partnership. Rasheed is to receive a 25% ownership interest in the new partnership. Any bonus is attributable to
Rasheed’s excellent business skills.
P 3
Bonus to New PartnerP 3
$18,000 - $24,000 = $(6,000) × ½ = $(3,000)
On January 4th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $18,000 cash in the
partnership. Rasheed is to receive a 25% ownership interest in the new partnership. Any bonus is attributable to
Rasheed’s excellent business skills.
Course Surveys?
Break Here On November 24th
Last LectureAgenda:• Withdraw of Partner• Death of Partner• Liquidating a Partnership (closing the business)
1. Review Session (remember the yellow problem)
2. Final Exam – Review Materials have been posted
3. Course Survey – return to my office if you did not do so in the last class
Withdrawal of a Partner
A partner can withdraw in two ways:1. The partner can sell his/ her partnership interest to another person.2. The partnership can distribute cash and/or other assets to the withdrawing partner.
A partner can withdraw in two ways:1. The partner can sell his/ her partnership interest to another person.2. The partnership can distribute cash and/or other assets to the withdrawing partner.
P 3
Withdrawal of a Partner At the date of the withdrawal of Perez, the partners have the
following capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed - $38,000. The partners share income and loss equally.
Perez is to receive $38,000 cash upon withdrawal from the partnership.
No Bonus
P 3
Withdrawal of a Partner At the date of the withdrawal of Perez, the partners have the following
capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed - $38,000. The partners share income and loss equally. Perez is to receive $34,000 cash
upon withdrawal from the partnership.
Bonus to Remaining Partners
P 3
Capital balance $ 38,000 Cash settlement 34,000 Bonus 4,000 Times 50% Bonus to each partner $ 2,000
Withdrawal of a Partner At the date of the withdrawal of Perez, the partners have the following
capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed - $38,000. The partners share income and loss equally. Perez is to
receive $40,000 cash upon withdrawal from the partnership.
Bonus to Withdrawing Partner
P 3
Capital balance $ 38,000 Cash settlement 40,000 Deficiency 2,000 Times 50% To each partner $ 1,000
Death of a PartnerA partner’s death dissolves a partnership. A deceased partner’s estate is entitled to receive his or her equity. The partnership agreement should contain provisions for settlement. These provisions usually require:1. Closing the books to determine income or loss since the
end of the previous period, and2. Determining and recording current market values for
both assets and liabilities.Settlement of the deceased partner’s estate can involve selling the equity to remaining partners or to an outsider, or it can involve withdrawal of assets.
P 3
Liquidation of a Partnership
A partnership dissolution requires four steps:1. Noncash assets are sold for cash and a gain or loss on
liquidations is recorded.
2. Gain or loss on liquidation is allocated to partners using their income-and-loss ratio.
3. Liabilities are paid or settled.
4. Any remaining cash is distributed to partners based on their capital balances.
P 3
No Capital Deficiency No capital deficiency means that all partners have a zero or credit
balance in their capital accounts.
Zayn, Perez, and Rasheed agree to dissolve their partnership. The only outstanding liability is an account payable of $20,000. Prior to
dissolution the partnership has the following balance sheet:
Zayn, Perez, and Rasheed agree to dissolve their partnership. The only outstanding liability is an account payable of $20,000. Prior to
dissolution the partnership has the following balance sheet:
P 4
Cash 178,000$ Accounts payable 20,000$ Land 40,000 K. Zayn, Capital 70,000
H. Perez, Capital 66,000 T. Rasheed, Capital 62,000
218,000$ 218,000$
BOARDSBalance Sheet
At January 15, 2013
No Capital Deficiency BOARDS begins the dissolution process by selling the land for
$46,000 cash. The gain on the sale of the land is distributed equally among the partners. After the sale of the land the company pays
the account payable.
BOARDS begins the dissolution process by selling the land for $46,000 cash. The gain on the sale of the land is distributed equally
among the partners. After the sale of the land the company pays the account payable.
P 4
Jan. 15 Cash 46,000 Land 40,000 K. Zayn, Capital 2,000 H. Perez, Capital 2,000 T. Rasheed, Capital 2,000 To record sale of land.
Jan. 15 Accounts payable 20,000 Cash 20,000 To record payment of accounts payable.
No Capital Deficiency After the sale of land for a gain and the payment of the company’s
accounts payable, BOARDS has the following balance sheet:After the sale of land for a gain and the payment of the company’s
accounts payable, BOARDS has the following balance sheet:
P 4
Accounts payable -$ Cash 204,000$ K. Zayn, Capital 72,000$
H. Perez, Capital 68,000 T. Rasheed, Capital 64,000
204,000$ 204,000$
BOARDSBalance Sheet
At January 15, 2013
Capital Deficiency Capital deficiency means that at least one partner has a debit balance in his or her capital account at the point of final cash distribution. This can arise from liquidation losses, excessive withdrawals before liquidation, or recurring losses in prior periods. A partner with a capital deficiency must, if possible, cover the deficit by paying cash into the partnership.
Capital deficiency means that at least one partner has a debit balance in his or her capital account at the point of final cash distribution. This can arise from liquidation losses, excessive withdrawals before liquidation, or recurring losses in prior periods. A partner with a capital deficiency must, if possible, cover the deficit by paying cash into the partnership.
P 4
Capital DeficiencyZayn, Perez, and Rasheed agree to dissolve their partnership.
Prior to the final distribution of cash to the partners, Zayn has a capital balance of $19,000, Perez $8,000, and Rasheed $(3,000). Rasheed owes
the partnership $3,000 and is able to pay the amount.
Zayn, Perez, and Rasheed agree to dissolve their partnership. Prior to the final distribution of cash to the partners, Zayn has a capital balance of $19,000, Perez $8,000, and Rasheed $(3,000). Rasheed owes
the partnership $3,000 and is able to pay the amount.
P 4
Partner Cannot Pay Deficiency
Zayn Perez Rasheed TotalEnding capital balances 19,000$ 8,000$ (3,000)$ 24,000$ Allocation of $3,000 deficiency (1,500) (1,500) 3,000 - Capital balances for dissolution 17,500 6,500 - 24,000
Let’s use the information from our previous example of a capital deficiency and assume partners divide profit and losses equally.Let’s use the information from our previous example of a capital deficiency and assume partners divide profit and losses equally.
P 4
Global View
Partnership accounting according to U. S. GAAP is similar, but not identical, to that under IFRS.1. Both U. S. GAAP and IFRS include broad and similar guidance for
partnership accounting. Partnership organization is similar worldwide, however, different legal systems dictate different implications and motivations for how a partnership is effectively set up.
2. The account for partnership admission, withdrawal, and liquidation is likewise similar worldwide. However, different legal systems impact partnership agreements and their implication to the parties.
End of Chapter 12
Insert 2015 Exam Here:
Practice Problem and Solution
Your Journey…
Your Journey…
Each of you has come so far… You speak and understand the “Language of Business” much better than you did four months ago…It has been an honor to take this journey with you this semester.
