CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS AND LIMITED

1. The main advantages for:

a. Proprietorship: Ease of formation and nontaxable entity.

b. Partnership: Expanded owner expertise and capital, nontaxable entity, and moderate complexity of formation.

c. Limited liability company: Limited liability to owners, expanded access to capital,nontaxable entity, and moderate complexity 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 ofcapital 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 is made according to their agreement. In addition, because of the unlimited liability of each partner for partnership debts, a particular partner maylose 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 admission andwithdrawal of partners (members). In addition, for an LLC, the operating agreement specifies whether the LLC is owner-managed or manager-managed.

5. 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 have to bear more than one-third of the lossesif one partner is unable to absorb his or her share of the losses.

6. 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 equal their shares of net income exactly.

7. 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 revenue accounts, credit the expense accounts, and credit the partners’ capital accounts for their respective shares of the net income.

8. 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.

DISCUSSION QUESTIONS

CHAPTER 12

LIMITED LIABILITY COMPANIESACCOUNTING FOR PARTNERSHIPS AND

12-1© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

DISCUSSION QUESTIONS (Continued)

9. 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 because the land was not revalued, C receives a 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.

10. 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.



PE 12-1A

Cash Accounts Receivable Patent

Accounts Payable 14,000Allowance for Doubtful Accounts 3,000Holly Renfro, Capital 140,000

PE 12-1B

Cash Inventory Land

Notes Payable 35,000Austin Fisher, Capital 218,000

PE 12-2A

Distributed to Chen and Monroe:Total

Annual salary allowance……………………… $35,000Interest allowance……………………………… 9,200

Total…………………………………………… $44,200

Remaining income……………………………… 25,800

Net income………….….………………………… $70,000

1$90,000 × 4%

2$140,000 × 4%

3($70,000 – $35,000 – $9,200) × 2/3

4($70,000 – $35,000 – $9,200) × 1/3

Chen: $55,800Monroe: $14,200

42,000175,000

$ 5,6008,600

$14,200

36,000

Monroe

$ 05,600

PRACTICE EXERCISES

20,00045,00092,000

$55,800

Chen

$35,0003,600

$38,60017,200

1

3

2

4



PE 12-2B

Distributed to Prado and Nicks:Total

Annual salary……………………………………… $38,000Interest……………………………………………… 3,500

Total……………………………………………… $11,000 $41,500

Deduct excess of allowances over income 5,750 11,500

Net income………………………………………… $ 5,250 $30,000

1$20,000 × 5%

2$50,000 × 5%

3($30,000 – $38,000 – $3,500) × 50%

Prado: $5,250Nicks: $24,750

PE 12-3A

a. LandTony Vale, Capital 25,000Ennis Leighton, Capital 25,000

($130,000 – $80,000) × 50%.

b. Ennis Leighton, CapitalCraig Roberts, Capital 30,500

($36,000 + $25,000) × 50%.

PE 12-3B

a. EquipmentKevin Camden, Capital [($39,000 – $30,000) × 2/3] 6,000Chloe Sayler, Capital 3,000

b. CashDemarco Lee, Capital 60,000

Prado

50,000

$10,0001,000

$28,0002,500

$30,5005,750

$24,750

Nicks

30,500

60,000

9,000

1 2

3



PE 12-4A

Equity of Gomez…………………………………………………………………… $240,000

Banks’s contribution……………………………………………………………… 380,000

Total equity after admitting Banks……………………………………………… $620,000Banks’s equity interest…………………………………………………………… 60

Banks’s equity after admission………………………………………………… $372,000

Banks’s contribution……………………………………………………………… $380,000Banks’s equity after admission………………………………………………… 372,000

Bonus paid to Gomez……………………………………………………………… $ 8,000

PE 12-4B

Equity of Hiro……………………………………………………………………… $75,000

Marone’s contribution…………………………………………………………… 20,000

Total equity after admitting Marone…………………………………………… $95,000Marone’s equity interest………………………………………………………...… 40

Marone’s equity after admission………………………………………………… $38,000Marone’s contribution…………………………………………………………… 20,000

Bonus paid to Marone…………………………………………………………… $18,000

PE 12-5A

Joyce’s equity prior to liquidation……………………………… $50,000

Realization of asset sales……………………………………… $190,000Book value of assets (liabilities + owner's equity)

($50,000 + $105,000 + $10,000)……………………………… 165,000

Gain on liquidation………………………………………………… $ 25,000Joyce’s share of gain (50% × $25,000)………………………… 12,500

Joyce’s cash distribution………………………………………… $62,500

PE 12-5B

Manning’s equity prior to liquidation………………………… $240,000

Realization of asset sales……………………………………… $410,000Book value of assets (liabilities + owner's equity)

($240,000 + $150,000 + $80,000)…………………………… 470,000

Loss on liquidation……………………………………………… $ (60,000)Manning’s share of loss [50% × ($60,000)]…………………… (30,000)

Manning’s cash distribution…………………………………… $210,000

×

×

%

%



PE 12-6A

a. Barns’s equity prior to liquidation……………………………… $ 55,000

Realization of asset sales………………………………………… $ 40,000Book value of assets (sum of capital accounts)*…………… 160,000

Loss on liquidation………………………………………………… $(120,000)Barns’s share of loss [50% × ($120,000)]……………………… (60,000)

$ (5,000)

* $105,000 + $55,000

b. $40,000 ($105,000 − $60,000 share of loss − $5,000 Barns’s deficiency; also equals theamount realized from asset sales)

PE 12-6B

a. Bonilla’s equity prior to liquidation…………………………… $ 185,000

Realization of asset sales………………………………………… $ 30,000Book value of assets (sum of capital accounts)*…………… 430,000

Loss on liquidation………………………………………………… $(400,000)Bonilla’s share of loss [50% × ($400,000)]…………………… (200,000)

Bonilla’s deficiency………………………………………………… $ (15,000)

* $185,000 + $245,000

b. $30,000 ($245,000 – $200,000 share of loss – $15,000 Bonilla’s deficiency; also, equalsthe amount realized from asset sales)

PE 12-7A$12,375,000

75 employees

$15,400,00088 employees

b. Niles and Cohen, CPAs grew revenues by $3,025,000 ($15,400,000 – $12,375,000), or 24.4% ($3,025,000 ÷ $12,375,000). The number of employees expanded by 13, or 17.3% (13 ÷ 75). The growth in revenue was more than the growth in the number of employees; thus, the revenue per employee improved between the two years. Thefirm is more efficient in generating revenues from its staff resources between thetwo years.

Barns’s deficiency…………………………………………………

a.

20Y5: = $175,000 per employee

=20Y4: $165,000 per employee



PE 12-7B$1,800,000

12 employees

$1,440,0009 employees

b. Eclipse Architects reduced revenues by $360,000 ($1,800,000 – $1,440,000), or 20% ($360,000 ÷ $1,800,000). The number of employees declined by 3, or 25% (3 ÷ 12). Thedecline in revenue was less than the decline in the number of employees; thus, the revenue per employee improved between the two years. The firm is more efficient in generating revenues from its staff resources between the two years.

a.

20Y2: = $160,000 per employee

=20Y1: $150,000 per employee



Ex. 12-1

Cash 20,000 Accounts Receivable* 140,000 Merchandise Inventory 101,700 Equipment 81,200

Allowance for Doubtful Accounts 4,400Kimberly Payne, Capital 338,500

* $145,000 – $5,000

Ex. 12-2

Cash 65,000 Accounts Receivable 125,000 Land 320,000 Equipment 34,800

Allowance for Doubtful Accounts 9,500Accounts Payable 24,800Notes Payable 76,000Hannah Freeman, Capital 434,500

EXERCISES



Ex. 12-3Hawes Albright

a. ………………………………………………………………………… $145,000 $145,000b. ………………………………………………………………………… 217,500 72,500c. ………………………………………………………………………… 120,900 169,100d. ………………………………………………………………………… 140,500 149,500e. ………………………………………………………………………… 144,000 146,000

Details: Hawes Albright Total

a. Net income (1:1)………………………………… $145,000 $145,000 $290,000

b. Net income (3:1)………………………………… $217,500 $ 72,500 $290,000

c. Interest allowance……………………………… $ 10,500 $ 3,500 $ 14,000Remaining income (2:3)………………………… 110,400 165,600 276,000Net income………………………………………… $120,900 $169,100 $290,000

d. Salary allowance………………………………… $ 36,000 $ 45,000 $ 81,000Remaining income (1:1)………………………… 104,500 104,500 209,000Net income………………………………………… $140,500 $149,500 $290,000

e. Interest allowance……………………………… $ 10,500 $ 3,500 $ 14,000Salary allowance………………………………… 36,000 45,000 81,000Remaining income (1:1)………………………… 97,500 97,500 195,000Net income………………………………………… $144,000 $146,000 $290,000

1$210,000 × 5%

2$70,000 × 5%

1

1 2

2



Ex. 12-4Hawes Albright

a. ……………………………………………………………………… $52,000 $52,000b. ……………………………………………………………………… 78,000 26,000c. ……………………………………………………………………… 46,500 57,500d. ……………………………………………………………………… 47,500 56,500e. ……………………………………………………………………… 51,000 53,000

Details: Hawes Albright Total

a. Net income (1:1)………………………………… $52,000 $52,000 $104,000

b. Net income (3:1)………………………………… $78,000 $26,000 $104,000

c. Interest allowance……………………………… $10,500 $ 3,500 $ 14,000Remaining income (2:3)……………………… 36,000 54,000 90,000Net income……………………………………… $46,500 $57,500 $104,000

d. Salary allowance………………………………… $36,000 $45,000 $ 81,000Remaining income (1:1)……………………… 11,500 11,500 23,000

Net income……………………………………… $47,500 $56,500 $104,000

e. Interest allowance……………………………… $10,500 $ 3,500 $ 14,000Salary allowance………………………………… 36,000 45,000 81,000Remaining income (1:1)……………………… 4,500 4,500 9,000

Net income……………………………………… $51,000 $53,000 $104,0001

$210,000 × 5%2

$70,000 × 5%

Ex. 12–5Leigh Byron

Meadows Leef Total

Salary allowances………………………………… $ 35,000 $ 25,000 $ 60,000Remainder (net loss, $20,000 plus $60,000 salary allowances) divided equally…………… (40,000) (40,000) (80,000)

Net loss……………………………………………… $ (5,000) $(15,000) $(20,000)

1

1

2

2



Ex. 12-6

a. The partners can divide net income in any ratio they wish. However, in the absence of an agreement, net income is divided equally between the partners.Therefore, Wanda’s conclusion was correct but for the wrong reasons. In addition,note that the monthly drawings have no impact on the division of income. These drawings are not the same as a salary allowance, which is part of a formal income-sharing agreement.

b. An income-sharing agreement could be designed to credit each partner’s capitalaccount for her respective share of income. For example, an income-sharingagreement could be designed to credit Wanda for interest on her capital contribution,whereas a salary allowance could be designed to credit Ava for the greater effort she puts into the partnership. After deducting for these items, the remaining income could be divided equally.

Ex. 12-7

a. Net income: $148,000Farley Clark Total

Salary allowance………………… $40,000 $30,000 $ 70,000Remaining income……………… 46,800 31,200 78,000Net income………………………… $86,800 $61,200 $148,000

Farley’s remaining income: ($148,000 – $70,000) × 3/5Clark’s remaining income: ($148,000 – $70,000) × 2/5

b. (1) RevenuesExpenses 520,000Martin Farley, Member EquityAshley Clark, Member Equity

(2) Martin Farley, Member Equity Ashley Clark, Member Equity

Martin Farley, DrawingAshley Clark, Drawing

Note: The reduction in members’ equity from withdrawals would be disclosed on the statement of members’ equity.

c. If the net income of the LLC was less than the sum of the salary allowances, bothmembers would still be credited with their salary allowances. From this amount, each partner would deduct his or her share of the excess of the total salary allowance over the net income. Thus, the difference between the net income and total salary allowances would be allocated to each partner as a deduction, according to the income-sharing ratio.

668,000

86,800

30,000

61,200

40,00030,000

40,000



Ex. 12-8

a.

Total

Salary allowance……………… $ 55,000 $ 55,000Interest allowance…………… $ 20,000 4,000 $16,000 40,000Remaining income (4:3:3)…… 106,000 79,500 79,500 265,000

Net income……………………… $126,000 $138,500 $95,500 $360,000

1 10% × $200,0002 10% × $40,0003 10% × $160,000

b. 20Y2 Dec. 31 Revenues

Expenses 900,000WLKT Partners, Member EquityMadison Sanders, Member EquityObserver Newspaper, LLC,

Member Equity

20Y2 Dec. 31 WLKT Partners, Member Equity

Madison Sanders, Member Equity*Observer Newspaper, LLC,

Member EquityWLKT Partners, DrawingMadison Sanders, DrawingObserver Newspaper, LLC,

Drawing

* $55,000 + $4,000

138,500

1,260,000

126,000

Observer

PartnersWLKT

SandersMadison

LLCNewspaper,

95,500

16,000

20,00059,000

16,000

59,00020,000

1 2 3



Ex. 12-8 (Concluded)

c.

Observer

WLKT Madison Newspaper, Total LLC

Partners Sanders LLC Capital

Balances, January 1, 20Y2 $200,000 $ 40,000 $160,000 $400,000

Capital additions 50,000 50,000Net income for the year 126,000 138,500 95,500 360,000Member withdrawals (20,000) (59,000) (16,000) (95,000)

Balances, December 31, 20Y2 $356,000 $119,500 $239,500 $715,000

d. An income-sharing agreement provides flexibility and fairness. Without an income-sharing agreement, each member would be credited with an equal proportion of the total earnings, or one-third each. However, the members providedifferent capital and effort to the LLC. WLKT is a large contributor of capital (funds), while Madison Sanders is providing ongoing effort and expertise. These separate contributions should be acknowledged in the income-sharing formula. Thus, the agreement credits member equity for both interest on capital and a salary allowance for Sanders. Any remaining income is credited to capital according to a negotiated allocation, which in this case is not an equal amountto each member.

MARVEL MEDIA, LLCStatement of Members’ Equity

For the Year Ended December 31, 20Y2



Ex. 12-9a. and b.

Myles Etter, Capital 70,000Lonnie Davis, Capital 70,000

$210,000 × 1/3.

Note: The sale to Davis is not a transaction of the partnership, so the sales price is not considered in this journal entry.

Ex. 12-10

a. (1) Trent Henry, Capital (1/5 × $160,000) 32,000 Tim Chou, Capital (1/4 × $100,000) 25,000

LeAnne Gilbert, Capital 57,000

(2) Cash 90,000Becky Clarke, Capital 90,000

b. Trent Henry, Capital ($160,000 – $32,000)……………… $128,000Tim Chou, Capital ($100,000 – $25,000)………………… 75,000LeAnne Gilbert, Capital…………………………………… 57,000Becky Clarke, Capital……………………………………… 90,000

The purchase price paid for each interest by Gilbert is not a partnershp transaction, but a transaction between partners. Thus, those amounts are not shown in the partnership accounts.



Ex. 12-11

a. Cash 30,000 Brad Paulson, Capital 2,500 Drew Webster, Capital 2,500

Austin Neel, Capital 35,000

b. Brad Paulson, Capital ($45,000 – $2,500)…………………… $42,500Drew Webster, Capital ($60,000 – $2,500)…………………… 57,500Austin Neel, Capital……………………………………………… 35,000

c. Tangible assets should be adjusted to current market prices so that the new partnerdoes not share in any gains or losses from changes in market prices prior to being admitted. For example, if the market price of land doubled prior to admitting a newpartner, the existing partners should realize the increase in the value of the land in their capital accounts prior to the new partner’s admission. Otherwise, the new partner would share in the increase in the market value of the land.

Ex. 12-12

a. Bonus received by Solano:

Cody Jenkins, capital…………………………………………… $ 78,000Lacey Tanner, capital…………………………………………… 46,000Solano’s contribution…………………………………………… 32,000

Total partners’ capital after admitting Solano……………… $156,000Solano’s equity interest after admission…………………… 30

Valeria Solano, capital…………………………………………… $ 46,800Solano’s contribution…………………………………………… 32,000

Bonus paid to Solano…………………………………………… $ 14,800

b. Cash 32,000 Cody Jenkins, Capital 7,400 Lacey Tanner, Capital 7,400

Valeria Solano, Capital 46,800

c. Apparently, Jenkins and Tanner value the expertise offered by Solano. Solano is able to use the computer to design and render landscape designs. This type of skill is likely to be very useful for both selling and implementing landscape ideas. Her skills can help the partnership sell ideas to clients by providing computer renderings of the designs. In this way, a client can see the design on the computerbefore agreeing to the work. In addition, the computer-aided landscapes provide materials plans, labor estimates, and other cost estimates for a particular design. Thus, the partners may be better able to control their costs by using Solano’s skills. Overall, they value her skills sufficiently to provide a partner bonus upon her admittance to the partnership.

× %



Ex. 12-13

a. Medical Equipment 40,000Abrams, Member Equity* 16,000Lipscomb, Member Equity** 24,000

* $40,000 × 2/5 = $16,000

** $40,000 × 3/5 = $24,000

b. (1) Cash 228,000Abrams, Member Equity* 15,600Lipscomb, Member Equity** 23,400Lin, Member Equity 189,000

* $39,000 × 2/5 = $15,600** $39,000 × 3/5 = $23,400

Supporting calculations for the bonus:

Abrams, member equity ($154,000 + $16,000)……… $170,000Lipscomb, member equity ($208,000 + $24,000)…… 232,000Contribution by Lin……………………………………… 228,000

Total equity after admitting Lin……………………… $630,000Lin’s equity interest after admission………………… 30

Lin, member equity……………………………………… $189,000

Contribution by Lin……………………………………… $228,000Lin’s equity interest after admission………………… 189,000

Bonus paid to Abrams and Lipscomb……………… $ 39,000

(2) Cash 124,000 Abrams, Member Equity* 3,000 Lipscomb, Member Equity** 4,500

Lin, Member Equity 131,500

* $7,500 × 2/5 = $3,000

** $7,500 × 3/5 = $4,500


Abrams, member equity………………………………… $170,000Lipscomb, member equity……………………………… 232,000Contribution by Lin……………………………………… 124,000

Total equity after admitting Lin……………………… $526,000Lin’s equity interest after admission………………… 25

Lin, member equity……………………………………… $131,500Contribution by Lin……………………………………… 124,000

Bonus paid to Lin……………………………………… $ 7,500

×

×

%

%



Ex. 12-14

a. L. Bowers, Capital 4,000 V. Lipscomb, Capital 4,000

Equipment 8,000

b. (1) Cash 20,000 L. Bowers, Capital* 4,800 V. Lipscomb, Capital 4,800

M. Ortiz, Capital 29,600

* $9,600 × 1/2


L. Bowers, capital ($96,000 – $4,000)…………………… $ 92,000V. Lipscomb, capital ($40,000 – $4,000)……………… 36,000Contribution by Ortiz……………………………………… 20,000

Total equity after admitting Ortiz……………………… $148,000Ortiz’s equity interest after admission………………… 20

M. Ortiz, capital…………………………………………… $ 29,600Contribution by Ortiz……………………………………… 20,000

Bonus paid to Ortiz………………………………………… $ 9,600

(2) Cash 60,000L. Bowers, Capital* 1,800V. Lipscomb, Capital 1,800M. Ortiz, Capital 56,400

* $3,600 × 1/2


L. Bowers, capital………………………………………… $ 92,000V. Lipscomb, capital……………………………………… 36,000Contribution by Ortiz……………………………………… 60,000

Total equity after admitting Otiz………………………… $188,000Ortiz’s equity interest after admission………………… 30

M. Ortiz, capital…………………………………………… $ 56,400

Contribution by Ortiz……………………………………… $ 60,000M. Ortiz, capital…………………………………………… 56,400

Bonus paid to Bowers and Lipscomb………………… $ 3,600

The bonus to Bowers and Lipscomb is credited equally between Bowers’ andLipscomb’s capital accounts.

×

×

%

%



Ex. 12-15

Total

Partnership

Capital

Balances, January 1, 20Y5 $300,000

Admission of Randy Campbell 75,000Salary allowance 40,000Remaining income 110,000Partner withdrawals (75,000)

Balances, December 31, 20Y5 $450,000

1 ($52,800 + $40,000) ÷ 22 $35,200 ÷ 23 $22,000 ÷ 2

Admission of Randy Campbell:

Equity of initial partners prior to admission……………………… $300,000Contribution by Campbell…………………………………………… 75,000

Total……………………………………………………………………… $375,000Campbell’s equity interest after admission……………………… 20%

Campbell’s equity after admission………………………………… $ 75,000Contribution by Campbell…………………………………………… 75,000

Bonus…………………………………………………………………… $ 0

Net income distribution:

The income-sharing ratio is equal to the proportion of the capital balances after admitting Campbell according to the partnership agreement:

$180,000$375,000

$120,000$375,000

$75,000$375,000

These ratios can be multiplied by the $110,000 remaining income after the salary allowance to Overton ($150,000 – $40,000). These amounts are credited to the respective partner capital accounts. For example, Dennis Overton: $52,800 = $110,000 × 48%.

Randy Campbell:

Campbell,

Capital

Dennis Overton:

Ben Testerman:

=

=

—40,00052,800

48%

Overton,

Capital

=

Testerman,

Capital

20%

(46,400)

$226,400

32%

35,200(17,600)

$137,600 $ 86,000

(11,000)22,000

$ 75,000$180,000

—$120,000

ANGEL INVESTOR ASSOCIATESStatement of Partnership Equity


Dennis RandyBen

×

1 2 3




Withdrawals:

Half of the remaining income is distributed to the three partners. Overton need not takethe salary allowance as a withdrawal but may allow it to accumulate in the member equity account. He is taking half of the allowance as a withdrawal.

Ex. 12-16

a. Merchandise Inventory 22,300Allowance for Doubtful Accounts 1,300Lane Stevens, Capital* 9,000Cherrie Ford, Capital** 6,000LaMarcus Rollins, Capital** 6,000

* ($22,300 – $1,300) × 3/7

** ($22,300 – $1,300) × 2/7

b. Lane Stevens, Capital* 159,000Cash 59,000Notes Payable 100,000

* $150,000 + $9,000

Ex. 12-17

a. The income-sharing ratio is determined by dividing the net income for each memberby the total net income. Thus, in 20Y3, the income-sharing ratio is as follows:

$57,000$190,000

$133,000$190,000

Or a 3:7 ratio

Idaho Properties, LLC:

Silver Streams, LLC:

=

= 70%

30%




b. Following the same procedure as in a.:

$62,500$250,000

$137,500$250,000

$50,000$250,000

c. Thomas Dunn provided a $230,000 cash contribution to the business. The amount credited to his member equity account is this amount less a $10,000 bonus paid to the other two members, or $220,000.

d. The positive entries to Idaho Properties and Silver Streams are the result of a bonuspaid by Thomas Dunn.

e. Thomas Dunn acquired a 22% interest in the business on January 1, 20Y4, computedas follows:

Thomas Dunn, member equity………………………… $ 220,000Idaho Properties, LLC, member equity……………… 333,000Silver Streams, LLC, member equity………………… 447,000

Total………………………………………………………… $1,000,000

Thomas’s ownership interest after admission ($220,000 ÷ $1,000,000)………………………………… 22%

f. Withdrawals need not be the same as the income credited to the members’ equity accounts. Withdrawals will be less than the amounts credited when the members want to retain capital in the business to support business growth or otherwise strengthen the business.

Idaho Properties, LLC:

Silver Streams, LLC:

Thomas Dunn:

55%

25%

= 20%

=

=



Ex. 12-18

a. Cash balance………………………………………………… $35,000Sum of capital accounts…………………………………… 46,000

Loss on realization………………………………………… $11,000

Hewitt Patel

Capital balances before realization……………………… $28,000 $18,000b. Division of loss on realization*…………………………… (5,500) (5,500)

Balances……………………………………………………… $22,500 $23,500c. Cash distributed to partners……………………………… 22,500 23,500

Final balances……………………………………………… $ 0 $ 0

* ($11,000) ÷ 2

Ex. 12-19

Oliver Ansari Total

Capital balances before realization………… $28,000 $35,000 $63,000Division of gain on realization [($67,000 – $63,000) ÷ 2]…………………… 2,000 2,000

Capital balances after realization…………… $30,000 $37,000Cash distributed to partners………………… 30,000 37,000

Final balances…………………………………… $ 0 $ 0

Ex. 12-20

a. Deficiency

b. $97,500 ($73,500 + $41,000 – $17,000)

c. CashFowler, Capital

Support for entry: Lewis Zapata Fowler

Capital balances after realization………… $73,500 $41,000 $(17,000)Receipt of partner deficiency…………… 17,000

Capital balances after eliminatingdeficiency…………………………………… $73,500 $41,000 $ 0

17,00017,000

Dr.



Ex. 12-21

a. $975 [$1,500 – ($225 + $300)]

b. Cash should be distributed as indicated in the following tabulation:

Bray Lincoln Mapes Total

Capital invested…………… $225 $300 $ — $ 525Net income…………………… +325 +325 +325 + 975

Capital balances and cash distribution………… $550 $625 $325 $1,500

* $1,500 – $225 – $300

c. Mapes has a capital deficiency of $75, as indicated in the followingtabulation:

Bray Lincoln Mapes Total

Capital invested…………… $225 $300 $ — $525Net loss……………………… – 75 – 75 –75 –225

Capital balances…………… $150 $225 $(75) $300

* $300 – $525

Ex. 12-22

Nettles King Tanaka

Capital balances after realization…………… $(15,000) $ 46,000 $71,000Distribution of partner deficiency…………… 15,000 (10,000) (5,000)

Capital balances after deficiency distribution…………………………………… $ 0 $ 36,000 $66,000

* $15,000 × 2/3

** $15,000 × 1/3

Dr.

*

*

* *


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12-

23

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Ex. 12-25

a. (1) RevenuesExpenses 421,000Angel Alvarez, CapitalEmma Allison, Capital

(2) Angel Alvarez, Capital 32,000 Emma Allison, Capital 39,000

Angel Alvarez, Drawing 32,000Emma Allison, Drawing 39,000

b.

Total

Balances, January 1, 20Y4 $120,000Additional investment during the year 8,000Net income for the year 62,000Withdrawals during the year (71,000)Balances, December 31, 20Y4 $119,000

483,000

AngelAlvarez

$ 65,000

31,000

31,00031,000

$ 47,0008,000

Emma

ALVAREZ AND ALLISONStatement of Partnership Equity

$ 54,000(39,000)

31,000(32,000)


$ 73,000—

Allison



Ex. 12-26$16,100,000,000

58,585

$14,900,000,00053,592

b. The revenues increased between the two years from $14.9 billion to $16.1 billion, or8.1% [($16.1 – $14.9) ÷ $14.9]. Revenues have increased sharply during this period. The number of employees has grown even more so, from 53,592 to 58,585, or 9.3% [(58,585 – 53,592) ÷ 53,592]. As a result, the revenue per professional staff employee has declined by approximately $3,200, from $278,027 to $274,814. There is a slight decline in efficiency during this time. It is possible Deloitte & Touche is staffing in anticpation of revenue growth, as it seems the firm is growing strongly.

Ex. 12-27$16,200,000

150

$18,400,000200

b. Revenues decreased between the two years; however, the number of employees has decreased at a faster rate. Thus, the revenue per employee increased from $92,000 in 20Y8 to $108,000 in 20Y9. This indicates that the efficiency of the firm has increased in the two years even though revenues declined. This is likely the result of the termination of the two contracts. That is, the large decrease in the employment base is the likely result of the reduction in business. Thus, the business was able to reduce the workforce faster than the revenue base. This suggests that the contracts were not very efficient from a revenue per employee perspective and thus were likely good candidates for termination.

=

Revenue per employee, 20Y9:

Revenue per employee, 20Y8:

$108,000

$92,000

a. =

=Revenue per professional staff, current year: $274,814

Revenue per professional staff, previous year: = $278,027

a.



Prob. 12-1A

1. Mar. 1 Cash 23,400Merchandise Inventory 62,600

Eric Keene, Capital 86,000

1 Cash 39,000Accounts Receivable 19,500Equipment 55,400

Allowance for Doubtful Accounts 1,400Accounts Payable 15,000Notes Payable 37,500Renee Wallace, Capital 60,000

2.

Current assets:Cash $62,400Accounts receivable $19,500Less allowance for doubtful accounts 1,400 18,100Merchandise inventory 62,600

Total current assets $143,100 Property, plant, and equipment:

Equipment 55,400 Total assets $198,500

Current liabilities:Accounts payable $15,000Notes payable 37,500

Total liabilities $ 52,500

Eric Keene, capital $86,000 Renee Wallace, capital 60,000 Total partners’ equity 146,000 Total liabilities and partners’ equity $198,500

** $23,400 + $39,000

Assets

Liabilities

Partners’ Equity

PROBLEMS

KEENE AND WALLACEBalance SheetMarch 1, 20Y8

**



Prob. 12-1A (Concluded)

3. 28 RevenuesExpenses 230,000Eric Keene, Capital*Renee Wallace, Capital*

28 Eric Keene, Capital 19,000Renee Wallace, Capital 24,000

Eric Keene, Drawing 19,000Renee Wallace, Drawing 24,000

* Computations:Total

Interest allowance…………………………… $ 8,600 $ 6,000 $14,600Salary allowance……………………………… 19,000 24,000 43,000Remaining income (1:1)……………………… 6,200 6,200 12,400

Net income……………………………………… $33,800 $36,200 $70,000

1 10% × $86,0002 10% × $60,0003 ($70,000 – $14,600 – $43,000) × 1/2

Feb.

Keene Wallace

300,000

33,80036,200

1 2

3 3



Prob. 12-2A

Plan Morrison Greene Morrison Greene

a. ……………………………………… $57,500 $57,500 $100,000 $100,000b. ……………………………………… 86,250 28,750 150,000 50,000c. ……………………………………… 38,333 76,667 66,667 133,333d. ……………………………………… 60,500 54,500 103,000 97,000e. ……………………………………… 45,500 69,500 88,000 112,000f. ……………………………………… 45,000 70,000 79,000 121,000

Details:

a. Net income (1:1)………………… $57,500 $57,500 $100,000 $100,000

b. Net income (3:1)………………… $86,250 $28,750 $150,000 $ 50,000

c. Net income (1:2)………………… $38,333 $76,667 $ 66,667 $133,333

d. Interest allowance……………… $ 9,000 $ 3,000 $ 9,000 $ 3,000Remaining income (1:1)………… 51,500 51,500 94,000 94,000

Net income……………………… $60,500 $54,500 $103,000 $ 97,000

e. Interest allowance……………… $ 9,000 $ 3,000 $ 9,000 $ 3,000Salary allowance………………… 40,000 70,000 40,000 70,000Excess of allowances over income (1:1)…………………… (3,500) (3,500)

Remaining income (1:1)………… 39,000 39,000

Net income……………………… $45,500 $69,500 $ 88,000 $112,000

f. Interest allowance……………… $ 9,000 $ 3,000 $ 9,000 $ 3,000Salary allowance………………… 40,000 70,000 40,000 70,000Bonus allowance………………… 1,000 18,000Excess of allowances over income (1:1)…………………… (4,000) (4,000)

Remaining income (1:1)………… 30,000 30,000

Net income……………………… $45,000 $70,000 $ 79,000 $121,000

1 $150,000 × 6% 2 ($115,000 – $12,000 – $110,000)/2 3 20% × [$115,000 – ($40,000 + $70,000)]4 20% × [$200,000 – ($40,000 + $70,000)]

$115,000 $200,000Morrison Greene Morrison Greene

$115,000 $200,000(1) (2)

1

2

3 4



Prob. 12-3A

1.

Professional fees Operating expenses:

Salary expenseDepreciation expense—buildingProperty tax expenseHeating and lighting expenseSupplies expenseDepreciation expense—office equipmentMiscellaneous expense

Total operating expenses Net income

Division of net income:

TotalSalary allowance……………………………… $45,000 $54,700 $ 99,700Interest allowance……………………………… 13,500 7,800 21,300Remaining income (1:1)……………………… 34,500 34,500 69,000

Net income……………………………………… $93,000 $97,000 $190,000

* $135,000 × 10%

** ($88,000 – $10,000) × 10%

2.

Balances, January 1, 20Y3Capital additionsNet income for the yearPartner withdrawalsBalances, December 31, 20Y3

Lambert Yost

LAMBERT AND YOSTStatement of Partnership Equity


LAMBERT AND YOSTIncome Statement


$395,300

$154,50015,70012,000

8,5006,0005,000

205,300

TylerLambert

Jayla

3,600

$190,000

JaylaTyler

(60,000) (110,000)(50,000)$125,000 $ 303,000

Yost

190,000

Total

$178,000

93,000

$ 78,000 $ 213,00010,000 10,000

$135,000—

97,000

***




3.

Current assets:Cash $ 34,000Accounts receivable 47,800Supplies 2,000

Total current assets $ 83,800 Property, plant, and equipment:

Land $120,000Building $157,500Less accumulated depreciation 67,200 90,300

Office equipment $ 63,600Less accumulated depreciation 21,700 41,900

Total property, plant, and equip. 252,200 Total assets $336,000

Current liabilities:Accounts payable $ 27,900Salaries payable 5,100


Tyler Lambert, capital $178,000 Jayla Yost, capital 125,000 Total partners’ equity 303,000 Total liabilities and partners’ equity $336,000

LAMBERT AND YOSTBalance Sheet

December 31, 20Y3

Assets

Liabilities

Partners’ Equity



Prob. 12-4A

1. June 30 Asset Revaluations 2,900Accounts Receivable 2,500Allowance for Doubtful Accounts 400[($42,500 – $2,500) × 5%] – $1,600.

30 Merchandise Inventory 4,600Asset Revaluations 4,600$76,600 – $72,000.

30 Accumulated Depreciation—Equipment 43,100Equipment 24,800Asset Revaluations 18,300$155,700 – $180,500.

30 Asset Revaluations 20,000Musa Moshref, Capital 10,000Shaniqua Hollins, Capital 10,000

2. July 1 Shaniqua Hollins, Capital 70,000Taylor Anderson, Capital 70,000

1 Cash 45,000Taylor Anderson, Capital 45,000

* –$2,900 + $4,600 + $18,300

*




3.

Current assets:Cash1 $ 53,000Accounts receivable $40,000Less allowance for doubtful accounts 2,000 38,000

Merchandise inventory 76,600Prepaid insurance 3,000



Current liabilities:Accounts payable $ 21,300Notes payable 35,000


Musa Moshref, capital2 $130,000 Shaniqua Hollins, capital3 25,000 Taylor Anderson, capital 115,000 Total partners’ equity 270,000 Total liabilities and partners’ equity $326,300

1 $8,000 + $45,0002 $120,000 + $10,0003 $85,000 + $10,000 – $70,000

MOSHREF, HOLLINS, AND ANDERSONBalance Sheet

July 1, 20Y7

Assets

Partners’ Equity

Liabilities


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ua

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b. 1

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izat

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$87,

000

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)P

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ent

of

liab

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s af

ter

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t o

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$67,

000

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of

def

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+4,

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——

——

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ance

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ance

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e $4

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icie

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n t

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oth

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ls a

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ch, i

n t

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com

e-sh

arin

g r

atio

(1:

1, r

esp

ecti

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). T

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efo

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ails

wo

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ab

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on

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of

the

$4,6

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r $2

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d W

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ld a

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e $4

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icie

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, or

$2,3

00.

b.

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al*

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ch, C

apit

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h

* $

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00 –

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300

** $

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00 –

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00

=+

++

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300

+

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ILS

, WE

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ND

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EE

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of

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ital

26,5

0040

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erio

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ove

mb

er 1

–30

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0

12-3

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earn

ing.

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hts

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erve

d. M

ay n

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anne

d, c

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or

post

ed to

a p

ubli

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acce

ssib

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hole

or

in p

art.


Prob. 12-1B

1. Apr. 1 Cash 18,000Merchandise Inventory 50,000

Whitney Lang, Capital 68,000

1 Cash 26,200Accounts Receivable 43,400Merchandise Inventory 28,900Equipment 63,400

Allowance for Doubtful Accounts 3,500Accounts Payable 23,400Notes Payable 15,000Eli Capri, Capital 120,000

2.

Current assets:Cash $ 44,200Accounts receivable $43,400Less allowance for doubtful accounts 3,500 39,900Merchandise inventory 78,900





Whitney Lang, capital $ 68,000 Eli Capri, capital 120,000 Total partners’ equity 188,000 Total liabilities and partners’ equity $226,400

* $18,000 + $26,200

** $28,900 + $50,000

LANG AND CAPRIBalance SheetApril 1, 20Y1

Assets

Liabilities

Partners’ Equity

*

**



Prob. 12-1B (Concluded)

3. 31 RevenuesExpenses 480,000Whitney Lang, Capital*Eli Capri, Capital*

31 Whitney Lang, Capital 40,000Eli Capri, Capital 30,000

Whitney Lang, Drawing 40,000Eli Capri, Drawing 30,000

* Computations:Total

Interest allowance…………………………… $ 6,800 $12,000 $ 18,800Salary allowance……………………………… 36,000 22,000 58,000Remaining income (1:1)…………………… 20,600 20,600 41,200

Net income…………………………………… $63,400 $54,600 $118,000

1 10% × $68,0002 10% × $120,0003 ($118,000 – $18,800 – $58,000) × 1/2

Mar.

Lang Capri

598,000

63,40054,600

1 2

33



Prob. 12-2B

Plan Howell Nickles Howell Nickles

a. …………………………………… $210,000 $210,000 $ 75,000 $75,000b. …………………………………… 168,000 252,000 60,000 90,000c. …………………………………… 280,000 140,000 100,000 50,000d. …………………………………… 249,500 170,500 87,500 62,500e. …………………………………… 218,250 201,750 83,250 66,750f. …………………………………… 254,550 165,450 92,550 57,450

Details:

Nickles

a. Net income (1:1)……………… $210,000 $210,000 $ 75,000 $75,000

b. Net income (2:3)……………… $168,000 $252,000 $ 60,000 $90,000

c. Net income (2:1)……………… $280,000 $140,000 $100,000 $50,000

d. Interest allowance…………… $ 5,000 $ 7,500 $ 5,000 $ 7,500Remaining income (3:2)……… 244,500 163,000 82,500 55,000

Net income……………………… $249,500 $170,500 $ 87,500 $62,500

e. Interest allowance…………… $ 5,000 $ 7,500 $ 5,000 $ 7,500Salary allowance……………… 38,000 19,000 38,000 19,000Remaining income (1:1)……… 175,250 175,250 40,250 40,250

Net income……………………… $218,250 $201,750 $ 83,250 $66,750

f. Interest allowance…………… $ 5,000 $ 7,500 $ 5,000 $ 7,500Salary allowance……………… 38,000 19,000 38,000 19,000Bonus allowance……………… 72,600 18,600Remaining income (1:1)……… 138,950 138,950 30,950 30,950

Net income……………………… $254,550 $165,450 $ 92,550 $57,450

1 $50,000 × 10%2 20% × [$420,000 – ($38,000 + $19,000)]3 20% × [$150,000 – ($38,000 + $19,000)]

Howell$420,000 $150,000

(1) (2)$420,000 $150,000

Nickles Howell

1

2 3



Prob. 12-3B

1.

Professional fees Operating expenses:

Salary expenseDepreciation expense—buildingHeating and lighting expenseDepreciation expense—office equipmentProperty tax expenseSupplies expenseMiscellaneous expense

Total operating expenses Net income

Division of net income:

TotalSalary allowance…………………………… $50,000 $65,000 $115,000Interest allowance………………………… 15,000 16,200 31,200Remaining income (loss) (1:1)…………… (7,100) (7,100) (14,200)

Net income…………………………………… $57,900 $74,100 $132,000* $125,000 × 12%

** ($155,000 – $20,000) × 12%

2.

TotalBalances, January 1, 20Y2Capital additionsNet income for the yearPartner withdrawalsBalances, December 31, 20Y2

423,300

$384,90012,900

$132,000

RAMIREZ AND XUEIncome Statement


$555,300

Statement of Partnership EquityFor the Year Ended December 31, 20Y2

10,5006,3003,2003,0002,500

$327,000(50,000)

Xue$135,000

Ramirez

Ping

RAMIREZ AND XUE

Camila

$260,000

CamilaRamirez Xue

Ping

20,000

(85,000)(35,000)132,00074,100

$147,900

57,900

$125,000— 20,000

$179,100

***




3.

Current assets:Cash $ 70,300Accounts receivable 33,600Supplies 5,800


Land $128,000Building $175,000Less accumulated depreciation 80,000 95,000

Office equipment $ 42,000Less accumulated depreciation 25,300 16,700

Total property, plant, and equip. 239,700 Total assets $349,400

Current liabilities:Accounts payable $ 12,400Salaries payable 10,000


Camila Ramirez, capital $147,900 Ping Xue, capital 179,100 Total partners’ equity 327,000 Total liabilities and partners’ equity $349,400

RAMIREZ AND XUEBalance Sheet

December 31, 20Y2

Assets

Liabilities

Partners’ Equity



Prob. 12-4B

1. Aug. 31 Asset Revaluations 1,800Accounts Receivable 1,500Allowance for Doubtful Accounts 300[($19,500 – $1,500) × 5%] – $600.

31 Merchandise Inventory 4,300Asset Revaluations 4,300$46,800 – $42,500.

31 Accumulated Depreciation—Equipment 15,500Equipment 3,000Asset Revaluations 12,500$64,500 – $67,500.

31 Asset Revaluations 15,000Brian Caldwell, Capital 7,500Adriana Estrada, Capital 7,500

2. Sept. 1 Adriana Estrada, Capital 26,000Kris Mays, Capital 26,000

1 Cash 32,000Kris Mays, Capital 32,000

* –$1,800 + $4,300 + $12,500

*




3.

Current assets:Cash1 $44,300Accounts receivable $18,000Less allowance for doubtful accounts 900 17,100

Merchandise inventory 46,800Prepaid insurance 1,200





Brian Caldwell, capital2 $62,500 Adriana Estrada, capital3 29,500

Kris Mays, capital4 58,000 Total partners’ equity 150,000 Total liabilities and partners’ equity $173,900

1 $12,300 + $32,0002 $55,000 + $7,5003 $48,000 + $7,500 – $26,0004 $26,000 + $32,000

CALDWELL, ESTRADA, AND MAYSBalance Sheet

September 1, 20Y9

Assets

Liabilities

Partners’ Equity


CH

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ne-

thir

d o

f th

e $1

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icie

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, or

$500

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ard

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o-t

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ds

of

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$1,5

00 d

efic

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cy, o

r $1

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b.

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0017

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00

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+

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IRC

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D, L

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, AN

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tate

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t o

f P

artn

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r th

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l 10–

30C

apit

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8 C

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ge L

earn

ing.

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hts

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erve

d. M

ay n

ot b

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anne

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d or

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art.

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R 1

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ccou

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g fo

r P

artn

ersh

ips

and

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ited

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ility

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pani

es

Pro

b. 1

2-6B

1.a.

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nca

shC

hap

elle

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ckP

ryo

r

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hA

sset

sL

iab

iliti

es(1

/5)

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)(2

/5)

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ance

s b

efo

re r

ealiz

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n$

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00$1

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00$3

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0$1

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00$

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00S

ale

of

asse

ts a

nd

div

isio

n o

f g

ain

+21

7,00

0–1

67,0

00—

+10

,000

+20

,000

+20

,000

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ance

s af

ter

real

izat

ion

$282

,000

$0

$30,

000

$24,

000

$122

,000

$106

,000

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men

t o

f lia

bili

ties

–30,

000

—–3

0,00

0—

——

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ance

s af

ter

pay

men

t o

f lia

bili

ties

$252

,000

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000

$122

,000

$106

,000

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h d

istr

ibu

ted

to

par

tner

s–2

52,0

00—

—–2

4,00

0–1

22,0

00–1

06,0

00F

inal

bal

ance

s$

0$

0$

0$

0$

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0

CH

AP

EL

LE

, RO

CK

, AN

D P

RY

OR

Sta

tem

ent

of

Par

tner

ship

Liq

uid

atio

nF

or

Per

iod

Au

gu

st 3

–29

Cap

ital

++

=+

+

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5©

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8 C

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ge L

earn

ing.

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hts

Res

erve

d. M

ay n

ot b

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or

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b. 1

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(C

on

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)

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.

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n$

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00$1

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00$3

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0$1

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ale

of

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f lo

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–38,

000

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ance

s af

ter

real

izat

ion

$137

,000

$0

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000

$(5

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)$

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00$4

8,00

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aym

ent

of

liab

iliti

es–3

0,00

0—

–30,

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——

—

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ance

s af

ter

pay

men

t o

f lia

bili

ties

$107

,000

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,000

)$

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00$4

8,00

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ecei

pt

of

def

icie

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+5,

000

——

+5,

000

——

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ance

s$1

12,0

00$

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00$4

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ash

dis

trib

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d t

o p

artn

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–112

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——

—–6

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inal

bal

ance

s$

0$

0$

0$

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2.a.

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ck, C

apit

alP

ryo

r, C

apit

alC

hap

elle

, Cap

ital

Th

e $5

,000

def

icie

ncy

of

Ch

apel

le w

ou

ld b

e d

ivid

ed b

etw

een

th

e o

ther

par

tner

s, R

ock

an

d P

ryo

r, in

th

eir

inco

me-

shar

ing

rat

io (

1:1,

res

pec

tive

ly).

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eref

ore

, Ro

ck w

ou

ld a

bso

rb o

ne-

hal

f o

f th

e $5

,000

def

icie

ncy

, or

$2,5

00, a

nd

Pry

or

wo

uld

ab

sorb

on

e-h

alf

of

the

$5,0

00 d

efic

ien

cy, o

r $2

,500

.

b.

Ro

ck, C

apit

al*

Pry

or,

Cap

ital

**C

ash

* $

64,0

00 –

$2,

500

** $

48,0

00 –

$2,

500

107,

000

61,5

0045

,500

2,50

02,

500

+=

++

+

5,00

0

CH

AP

EL

LE

, RO

CK

, AN

D P

RY

OR

Sta

tem

ent

of

Par

tner

ship

Liq

uid

atio

n

Cap

ital

Fo

r P

erio

d A

ug

ust

3–2

9

12-4

6©

201

8 C

enga

ge L

earn

ing.

All

Rig

hts

Res

erve

d. M

ay n

ot b

e sc

anne

d, c

opie

d or

dup

lica

ted,

or

post

ed to

a p

ubli

cly

acce

ssib

le w

ebsi

te, i

n w

hole

or

in p

art.


CP 12-1

This scenario highlights one of the problems that arises in partnerships: attempting to align contribution with income division. Often, disagreements are based on honest differences of opinion. However, in this scenario, there is evidence that Robbins was acting unethically. Robbins apparently made no mention of his plans to “scale back” once the partnership was consummated.As a result, Barrow agreed to an equal division of income based on theassumption that Robbins’s past efforts would project into the future, while infact, Robbins had no intention of this. As a result, Barrow is now providingmore effort while receiving the same income as Robbins. This is clearly notsustainable in the long term. Robbins does not appear to be concerned aboutthis inequity. Thus, the evidence points to some duplicity on Robbins’s part.Essentially, he knows that he is riding on Barrow’s effort and had planned itthat way.

Barrow could respond to this situation by either withdrawing from thepartnership or changing the partnership agreement. One possible changewould be to provide a partner salary based on the amount of patient billings.This salary would be highly associated with the amount of revenue broughtinto the partnership, thus avoiding disputes associated with unequalcontributions to the firm.

CASES & PROJECTS



CP 12-2a. and b.

This table is from the 2015 "Accounting Today Top 100 Firms."

Total Revenues Revenues(in millions) *per Partner

Deloitte & Touche………………… $14,908 $4,920,132PwC…………………………………… 11,724 4,356,745Ernst & Young……………………… 9,900 3,666,667KPMG………………………………… 6,870 3,789,300

* Revenue per partner is determined by dividing the total revenue by the number ofpartners for each firm, adjusting the revenues for the fact that they are expressed in millions in the table. For example, revenue per partner is determined for Deloitte &Touche as follows:

Deloitte & Touche revenueper partner:

c.Percent of

Revenue per Deloitte &

Partner Touche

Deloitte & Touche…………………… $4,920,132 100%PwC…………………………………… 4,356,745 89%KPMG…………………………………… 3,789,300 77%Ernst & Young………………………… 3,666,667 75%

* $4,356,745 ÷ $4,920,132

d. As can be seen, Deloitte & Touche has the highest revenue per partner relative to the other three firms, while Ernst & Young has the lowest. Ernst & Young’s revenue per partner is 75% of Deloitte & Touche’s. These data suggest that Deloitte & Touche has a somewhat smaller relative partner base supporting its revenues than do the other three firms. This result may be from the advantage of relative size (inrevenues) compared to the other two firms.

$14,9083,030

× 1,000,000

Total

$4,920,132

Partners

3,0302,6912,7001,813

=

*



CP 12-3

When developing an LLC (or partnership), the operating (or partnership) agreement is a critical part of establishing a business. Each party must consider the various incentives of each individual in the LLC. For example, in this case, one party, Lindsey Wilson, is providing all of the funding, while the other twoparties are providing expertise and talent. This type of arrangement can create some natural conflicts because the interests of an investor might not be the same as those operating the LLC. Specifically, you would want to adviseWilson that not all matters should be settled by majority vote. Such a provisionwould allow the two noninvesting members to vote as a block to the detriment of Wilson. For example, the salaries for the two working members could be setby their vote so that little profit would be left to be distributed. This wouldessentially keep Wilson’s return limited to the 10% preferred return. Wilsonshould insist that salary allowances require unanimous approval of all members.

A second issue is the division of partnership income. The suggested agreementis for all the partners to share the remaining income, after the 10% preferred return, equally. Wilson should be counseled to consider all aspects of the LLC contribution to determine whether this division is equitable. There are many considerations, including the amount of investment, risk of the venture, degree of expertise of noninvesting partners, and degree of exclusivity of noninvesting members’ effortcontribution (unique skills or business connections, for example). Often, the simple assumption of equal division is not appropriate.

In addition, it is sometimes best to require working members to have an investmentin the LLC, even if it is small, so that they are sensitive to the perspective of financial loss.



CP 12-4

A good solution to this problem would be to divide income into three steps:

1. Provide interest on each partner’s capital balance.2. Provide a monthly salary for each partner.3. Divide the remainder according to a partnership formula.

With this approach, the return on capital and effort will be calculated separately in the income division formula before applying the percentageformula. Thus, Willard will receive a large interest distribution based on thelarge capital balance, while Hill should receive a large salary distributionbased on the larger service contribution. The return on capital and salary allowances should be based on prevailing market rates. If both partners are pleased with their return on capital and effort, then the remaining income could be divided equally between them.


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CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS AND LIMITED