Advanced Accounting by Hoyle et al, 6th Edition

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Partnerships Formation and Operation
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PartnershipsCapital Accounts

• The equity section of a partnership consists of
  capital balances for each partner.
• Profits/losses each period are allocated to each
  partners capital account.
• Withdrawals by partners reduce their capital
  accounts.

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Articles of Partnership

• Partnerships can exist even in the absence of a
  written partnership agreement.
• The Uniform Partnership Act establishes standards
  and rules for partnerships.
• A written agreement will supercede the UPA
  standards.

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Articles of Partnership
Method for admitting new partners
Method for dispute settlements
Profit/loss sharing percentages
Initial contribution to be made by each partner
Withdrawal limits
Put it in writing!
Method for valuing individual contributions
Rights and responsibilities of partners
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Accounting for Capital Contributions

• If the partners each contribute cash . . .
• . . . debit Cash.
• . . . credit individual Partner Capital accounts.

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Accounting for Capital Contributions

• If the partners each contribute cash and other
  assets . . .
• . . . debit Cash contributed assets for FMV.
• . . . credit individual Partner Capital accounts.

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Accounting for Capital Contributions

• Intangible assets, such as expertise, require
  special consideration
• Use either the Bonus Method or the Goodwill
  Method.

• Record the tangible assets contributed.
• Adjust the partner capital balances to reflect
  the relative value of the intangible asset.

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Intangible ContributionsBonus Method

• On 2/15/98, Greene and Redd form a partnership.
  They agree to equal capital balances. Greene
  contributes 80,000 cash. Redd contributes land
  valued at 40,000.

Prepare the journal entry to set up the
partnership.
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Intangible ContributionsBonus Method
Total tangible assets for the partnership are
120,000. The partners have agreed to have equal
capital balances, based on the contributed
assets. Even though Redd only contributed land
worth 40,000, essentially, Greene has given Redd
a 20,000 bonus.
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Intangible ContributionsGoodwill Method

• Record the tangible assets contributed.
• Record the contributed intangible asset as the
  difference between the contributed tangible
  assets and the implied value of the partnership.

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Intangible ContributionsGoodwill Method
On 2/15/98, Greene and Redd form a partnership.
They agree to equal capital balances. Greene
contributes 80,000 cash. Redd contributes land
valued at 40,000, and brings years of experience
to the new business.
Prepare the journal entry to set up the
partnership.
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Intangible ContributionsGoodwill Method
On 2/15/98, Greene and Redd form a partnership.
They agree to equal capital balances. Greene
contributes 80,000 cash. Redd contributes land
valued at 40,000, and brings years of experience
to the new business.

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Intangible ContributionsGoodwill Method
Greenes capital account is credited for the
tangible contribution of 80,000. Redds capital
account is credited for the tangible contribution
of 40,000, plus the intangible contribution
valued at 40,000.
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Allocation of Income

• The allocation of income is not based on the
  relative capital balances.
• It is a separately negotiated item.
• Items to be allocated

Remaining income
Interest on beginning capital balances
Bonuses
Allocated compensation
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Allocation of IncomeExample

• Lebo and Smith, a retail partnership, has
  beginning of period capital balances of 50,000
  and 70,000 respectively. Net income for the
  period is 100,000.
• Both partners are credited with 10 interest on
  their beginning capital balance. In addition,
  Lebo is credited with a bonus of 20,000 per the
  partnership agreement. They share income 4060
  (LeboSmith).
• What are the ending capital balances for each
  partner?

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Allocation of IncomeExample
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Admission of a New PartnerThe Rights of a Partner

• An individual partners ownership rights
  include
• The right to co-ownership of the partnership
  property.
• The right to share in profits and losses as
  specified in the partnership agreement
• The right to participate in the management of the
  partnership.

These two rights can be sold.
This right cannot be sold without the other
partners approval.
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Partnership DissolutionAdmission of a New Partner

• When the makeup of the partnership changes, the
  partnership is dissolved.
• A new partnership is immediately formed.
• New partner acquires partnership interest by
• Purchasing it from the other partners, or
• Making a contribution to the partnership.

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Admission of a New PartnerPurchase of a Current
Interest

• A new partner can purchase partnership interest
  directly from the existing partners.
• The cash goes to the partners, not to the
  partnership.
• Two methods are available to account for the
  transfer of ownership.
• Book Value Approach
• Goodwill (Revaluation) Approach

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Admission of a New PartnerPurchase of a Current
Interest

• Book Value Example
• Doe, Raye, and Mee have a partnership.
• Using the Book Value Approach, prepare the entry
  assuming Flatt pays 60,000 directly to the other
  partners for a 20 partnership interest.

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Admission of a New PartnerPurchase of a Current
Interest

• Book Value Example
• The cash goes to Doe, Raye, and Mee, NOT to the
  partnership.
• Each partner gives up 20 of their existing
  capital.

Prepare the journal entry to admit Flatt to the
partnership.
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Admission of a New PartnerPurchase of a Current
Interest
Now, lets take a look at the Goodwill Approach.
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Admission of a New PartnerPurchase of a Current
Interest

• Goodwill (Revaluation) Example
• Doe, Raye, and Mee have a partnership.
• Using the Goodwill Approach, prepare the entry
  assuming Flatt pays 60,000 directly to the other
  partners for a 20 partnership interest.

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Admission of a New PartnerPurchase of a Current
Interest

• Goodwill (Revaluation) Example
• The implied value of the partnership is 300,000
• 60,000 20 300,000
• First, compute the Goodwill

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Admission of a New PartnerPurchase of a Current
Interest

• Goodwill (Revaluation) Example
• Allocate the 160,000 of Goodwill to the existing
  partners, based on their income sharing .
  (402535)

Prepare the journal entry to allocate goodwill to
Doe, Raye, Mee.
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Admission of a New PartnerPurchase of a Current
Interest

• Goodwill (Revaluation) Example
• The new balances for Doe, Raye, and Mee appear as
  follows
• Next, allocate 20 from each of the existing
  partners to Flatt.

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Admission of a New PartnerPurchase of a Current
Interest

• Revaluation Example
• Note that Flatts balance, after allocation from
  the current partners, equals Flatts contribution
  of 60,000.

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Admission of a New PartnerContribution to the
Partnership

• The new partner can gain partnership interest by
  contributing cash to the partnership.
• Remember that the new cash will increase the
  partnerships net assets.
• Two methods are
• Bonus Approach
• Goodwill Approach

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Admission of a New PartnerContribution to the
Partnership

• Bonus Example
• Doe, Raye, and Mee have a partnership.
• Using the Bonus Approach, prepare the entry
  assuming Flatt pays 60,000 to the partnership
  for a 20 partnership interest.

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Admission of a New PartnerContribution to the
Partnership

• Bonus Example
• Net assets after the contribution are 200,000.
• Flatt gets credit for 20 of net assets (200,000
  x 20).
• The remainder of the 60,000 contribution is
  allocated to the other partners.

Note that the 200,000 results from the net
assets of the partnership of 140,000 Flatts
60,000 contribution.
Prepare the journal entry.
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Admission of a New PartnerContribution to the
Partnership
Now, lets take a look at the Goodwill Approach.
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Admission of a New PartnerContribution to the
Partnership

• Goodwill Example
• Doe, Raye, and Mee have a partnership.
• Using the Goodwill Approach, prepare the entry
  assuming Flatt pays 60,000 to the partnership
  for a 20 partnership interest.

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Admission of a New PartnerContribution to the
Partnership

• Goodwill Example
• Net assets after the contribution are 200,000.
• Implied value of the partnership is 300,000.
• 60,000 20 300,000
• Goodwill to be recorded is 100,000 (300,000 -
  200,000)

Prepare the journal entry to allocate goodwill to
Doe, Raye, Mee.
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Admission of a New PartnerContribution to the
Partnership

• Goodwill Example
• After allocating the goodwill to the original
  partners, record Flatts cash contribution and
  credit Flatts capital account.

Prepare the journal entry to admit Flatt to the
partnership.
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End of Chapter 14
Accounting for my partners is easy. Its
accounting for their taste that I find difficult!