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College Accounting. Heintz & Parry 20 th Edition. 19. Accounting for Partnerships. 1. Describe the various types of partnerships, their characteristics, the partnership agreement, and the advantages and disadvantages of a partnership. PARTNERSHIP. - PowerPoint PPT PresentationTRANSCRIPT
College AccountingCollege Accounting
Heintz & ParryHeintz & Parry2020thth Edition Edition
Heintz & ParryHeintz & Parry2020thth Edition Edition
ChapterChapter 1919
Accounting for Partnerships
Accounting for Partnerships
1Describe the various types of
partnerships, their
characteristics, the
partnership agreement, and the
advantages and disadvantages
of a partnership.
PARTNERSHIPPARTNERSHIP
• “An association of two or more persons who carry on, as co-owners, a business for profit”
– Used for all types of enterprises• More popular among personal service
enterprises than merchandising businesses
PARTNERSHIP AGREEMENTPARTNERSHIP AGREEMENT
• Defined as “a written agreement containing the provisions for operating a partnership”– Essential provisions include:
• Date of the agreement• Names of the partners• Kind of business to be conducted• Length of time the partnership is to run• Name and location of the business• Investment of each partner• Basis on which profits and losses are to be shared• Limitation of partners’ rights and activities• Salary allowances to partners• Division of assets upon dissolution of partnership• Signatures of the partners
CHARACTERISTICSCHARACTERISTICS
• All assets held by a partnership are co-owned by all partners. If one partner contributes an asset to the business, the asset is jointly owned by all partners.
CO-OWNERSHIP OF ASSETS
Advantages: Ability and expertise combined
into one enterprise and easier to raise capital
CHARACTERISTICSCHARACTERISTICS
• Any partner can bind the other partners to a contract if he or she is acting within the general scope of the business.
MUTUAL AGENCY
Disadvantage:Serious
consequences ifpartners don’t
act responsibly
CHARACTERISTICSCHARACTERISTICS
• A partnership may be dissolved as the result of any change in the ownership (e.g. death, bankruptcy, incapacity, withdrawal of a partner, addition of a new partner, or expiration of the time specified in the partnership agreement).
LIMITED LIFE
CHARACTERISTICSCHARACTERISTICS
• Each partner is personally liable for ALL debts incurred by the partnership.
UNLIMITED LIABILITY
Major disadvantage:A partner could
losepersonal assets
CHARACTERISTICSCHARACTERISTICS
• A partnership is not subject to federal income tax. But, partners must report their share of the partnership’s income on their personal income tax returns.
FEDERAL INCOME TAXES
2
Prepare entries for the
initial investments in a
partnership.
INVESTMENTSINVESTMENTS
EXAMPLE: Sam Mitchell and Lisa Jenkins begin the Mitchell & Jenkins Partnership by investing $350,000 and $200,000,
respectively.
Let’s look at thejournal entry!
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 350,000
Sam Mitchell, Capital 350,000
S. Mitchell invested
$350,000 in cash
Cash
Lisa Jenkins, Capital
L. Jenkins invested
$200,000 in cash
200,000
200,000
Separate capital and drawing accountsare maintained for each partner.
INVESTMENTSINVESTMENTS
• What if instead of $200,000 in cash, Lisa Jenkins had invested:
– Inventory valued at $47,500, on which $10,500 was owed
– Office equipment valued at $40,000– Delivery equipment valued at $92,000,
on which $19,000 was owed on a note– $50,000 in cash
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 50,000
47,500Inventory
Lisa Jenkins, Capital
19,000
200,000
Each asset invested and liability assumed is recorded. The
difference is credited to the capital account.
Office Equipment 40,000
Delivery Equipment 92,000
Notes Payable
Accounts Payable 10,500
COMBINING BUSINESSESCOMBINING BUSINESSES
• On April 1, Donna Morning and Larry Knight form a partnership under the firm name of Morning & Knight Sports
• They agree to invest their assets in the partnership. The partnership will also assume the liabilities shown on their balance sheets
• Profits/losses are to be shared 50-50• In the case of dissolution, assets are to be
distributed between partners in the ratio of their capital interests at the time of dissolution
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COMBINING BUSINESSES COMBINING BUSINESSES
Morning SportsBalance SheetMarch 31, 20--
Assets LiabilitiesCash $ 6,344Accts. receivable $5,524Less allow. forbad debts 430 5,094Mdse. inventory 24,574Store equipment $3,840Less accum. depr. 1,000 2,840Total assets $38,852
Notes payable $4,600Accounts payable 9,082Total liabilities $13,682
Owner’s EquityMorning, capital 25,170
$38,852Total liab. & O.E.
Let’s look at the journal entryto record Donna Morning’s
investment in the new partnership.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 6,344
5,524Accounts Receivable
Any uncollectible accounts should
be written off before formingthe partnership. Morning Sports
had no accounts considered
uncollectible.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 6,344
5,524Accounts Receivable
Merchandise Inventory 24,574
Since Donna uses FIFO,the merchandise inventory
account reflects current market values.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 6,344
5,524Accounts Receivable
Merchandise Inventory 24,574
Store Equipment 3,600
Assets are recorded at theirfair market values (not book
values) at the time of investment.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 6,344
5,524Accounts Receivable
Accounts Payable
430
9,082
Merchandise Inventory 24,574
Store Equipment 3,600
Allowance for Bad Debts
Notes Payable 4,600
The allowance account and the liabilities
are recorded at the values shown on Morning Sports’ balance sheet.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 6,344
5,524Accounts Receivable
Accounts Payable
430
9,082
Merchandise Inventory 24,574
Store Equipment 3,600
Allowance for Bad Debts
Notes Payable 4,600
The capital account is credited for thedifference between assets
invested and liabilities assumed.
D. Morning, Capital 25,930
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
COMBINING BUSINESSES COMBINING BUSINESSES
Knight AthleticsBalance SheetMarch 31, 20--
Assets LiabilitiesCash $ 3,544Accts. receivable $5,280Less allow. forbad debts 720 4,560Mdse. inventory 29,692Supplies
$4,320Less accum. depr. 1,100 3,220
Total assets $44,902
Notes payable $ 6,000Accounts payable 13,238Total liabilities $19,238
Knight, capital 25,664$44,902Total liab. & O.E.
286Office equipment
Store equipment $4,800Less accum. depr. 1,200 3,600
Knight’s assets andliabilities are brought
intothe new partnership.
Owner’s Equity
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 3,544
5,280Accounts Receivable
Accounts Payable
3,850
720
Merchandise Inventory 29,692
Store Equipment
286
Allowance for Bad Debts
Notes Payable
4,200
L. Knight, Capital
6,000
Supplies
Office Equipment
13,238
26,894
3Explain how partners are
compensated and account
for the allocation of net
income.
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
EXAMPLE: The partnership of Mitchell and Jenkins earned net income of
$190,800 for the year.
S. Mitchell L. Jenkins
$95,400 $95,400
If Mitchell and Jenkins had notspecified how the income was to
besplit, it would be split evenly.
Entries #1 & 2 are the same as for sole proprietorships.
Entries #3 & 4 are different for partnerships.
PARTNERSHIP CLOSING ENTRIESPARTNERSHIP CLOSING ENTRIES
• Four Entries
1.Close all revenues to Income Summary
2.Close all expenses to Income Summary
3.Close Income Summary by allocating each partner’s share of net income or loss to the individual capital accounts
4.Close each partner’s drawing account to the individual capital accounts.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
(3) Income Summary 190,800
95,400S. Mitchell, Capital
Instead of all the net income being
credited to one capital account,it is allocated to each partner’s
capital account.
95,400L. Jenkins, Capital
Closing Entries
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
(3) Income Summary 190,800
95,400S. Mitchell, Capital
95,400L. Jenkins, Capital
(4) S. Mitchell, Capital
S. Mitchell, Drawing
36,000
36,000
L. Jenkins, Capital
L. Jenkins, Drawing
48,000
48,000
Closing EntriesAssume Mitchell withdrew $36,000 and Jenkins withdrew $48,000 during the year. Each partner’s drawing account is
closed to his respective capital account.
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
EXAMPLE: The partnership of Mitchell and Jenkins earned net income of
$190,800 for the year.
S. Mitchell L. Jenkins
Mitchell and Jenkins did specifyhow the income was to be split—
after salary allowances, the remaining
net income was to be split 60-40.
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
EXAMPLE: The partnership of Mitchell and Jenkins earned net income of
$190,800 for the year.
S. Mitchell L. Jenkins
$36,000 $48,000
Salary allowances total $84,000.Remaining net income is
$106,800($190,800 – $84,000).
Salary allowances
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
EXAMPLE: The partnership of Mitchell and Jenkins earned net income of
$190,800 for the year.
S. Mitchell L. Jenkins
$36,000 $48,000
$106,800 60% = $64,080
Salary allowances64,080
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
EXAMPLE: The partnership of Mitchell and Jenkins earned net income of
$190,800 for the year.
S. Mitchell L. Jenkins
$36,000 $48,000
$106,800 40% = $42,720
Salary allowances64,080 42,720Remaining income
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
EXAMPLE: The partnership of Mitchell and Jenkins earned net income of
$190,800 for the year.
S. Mitchell L. Jenkins
$ 36,000 $48,000Salary allowances64,080 42,720Remaining income
$100,080 $90,720
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Income Summary 190,800
100,080S. Mitchell, Capital
90,720L. Jenkins, Capital
A closing entry is made for the total allocated to each
partner.
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Income Summary 190,800
100,080S. Mitchell, Capital
90,720L. Jenkins, Capital
S. Mitchell, Capital
S. Mitchell, Drawing
36,000
36,000
L. Jenkins, Capital
L. Jenkins, Drawing
48,000
48,000
Next, close eachowner’s drawing
account.
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
EXAMPLE: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net income of $44,000 for the
year. S. Mitchell L. Jenkins
$36,000 $48,000Salary allowances
The salary allowancesalone total more
than the net income!
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
S. Mitchell L. Jenkins
$36,000 $48,000Salary allowances
$84,000
Salary allow. –
44,000$40,000
Net incomeExcess to be absorbed by partners
EXAMPLE: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net income of $44,000 for the
year.
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
S. Mitchell L. Jenkins
$ 36,000 $48,000Salary allowances
$40,000 60%
(24,000)
EXAMPLE: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net income of $44,000 for the
year.
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
S. Mitchell L. Jenkins
$ 36,000 $ 48,000Salary allowances
$40,000 40%
(24,000) (16,000)
EXAMPLE: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net income of $44,000 for the
year.
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
S. Mitchell L. Jenkins
$ 36,000 $ 48,000Salary allowances
(24,000) (16,000)
$ 12,000 $ 32,000
$12,000 + $32,000 =
$44,000 net income
EXAMPLE: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net income of $44,000 for the
year.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Income Summary 44,000
12,000S. Mitchell, Capital
32,000L. Jenkins, Capital
Entries to close the drawingaccounts would be
the same as the previous example.
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
EXAMPLE: B. K. Kelly and S. B. Arthur form a partnership on January 1 of the current year.
Kelly will devote full time to operating the business, invest $50,000, and draw a salary of $35,000 per year. Arthur will devote about 10 hours per week, invest $150,000, and draw a salary of $10,000 per year. The partners will
be allowed interest of 10% on capital balances on January 1 of each year and the balance of
the earnings will be divided equally. Let’s allocate the first
yearnet income of $80,000.
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
Kelly had a capital balance
of $50,000 on January 1.($50,000 10%)
B. K. Kelly S. B. Arthur
Salary allow.$35,000 $10,000Interest allow.5,000
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
Arthur had a capital balance
of $150,000 on January 1.($150,000 10%)
B. K. Kelly S. B. Arthur
Salary allow.$35,000 $10,000Interest allow.5,000 15,000
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
Kelly has allowances of $40,000 so far.
Arthur has $25,000 so far.$80,000 – $65,000 = $15,000
remainingSplit evenly = $7,500 each
B. K. Kelly S. B. ArthurSalary allow.$35,000 $10,000Interest allow.5,000 15,000
Remaining income7,500 7,500
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
B. K. Kelly S. B. ArthurSalary allow.$35,000 $10,000Interest allow.5,000 15,000Remaining income7,500 7,500
$47,500 $32,500
What if the partnership hada loss of $20,000 in the first
year?
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
B. K. Kelly S. B. ArthurSalary allow.$35,000 $10,000Interest allow.5,000 15,000
Salary and interest allowances
would still be given, totaling $65,000.
ALLOCATING PROFIT OR LOSSALLOCATING PROFIT OR LOSS
B. K. Kelly S. B. ArthurSalary allow.$ 35,000 $ 10,000Interest allow.5,000 15,000
The allowances plus the lossleave $85,000 to be absorbed
equally.
(42,500) (42,500)$ (2,500) $(17,500)
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Income Summary
2,500
17,500
B. K. Kelly, Capital
20,000
S. B. Arthur, Capital
Capital accounts arereduced this year.
4
Prepare financial
statements reporting the
allocation of net income
and partnership equity.
PARTNERSHIP FINANCIAL STATEMENTS
PARTNERSHIP FINANCIAL STATEMENTS
• The allocation of net income and its impact on the capital balances should be disclosed in the financial statements.
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FINANCIAL STATEMENTSFINANCIAL STATEMENTS
Net income $80,000
Kelly Arthur Total
Allocation of net income:
Salary allowances
Interest allowancesRemaining incomeAllocation of net income $47,500 $32,500 $80,000
$35,000 $10,000 $45,000
5,000
7,500
15,000
7,500
20,000
15,000
Distribution of income is shown at the bottom
of the income statement.
Kelly and ArthurIncome Statement (Partial)
For Year Ended December 31, 20--
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FINANCIAL STATEMENTSFINANCIAL STATEMENTS
Kelly Arthur Total
Capital, January 1, 20--
Net income for the year
Withdrawals (salaries during the year)
Capital, December 31, 20-- $62,500 $182,500 $245,000
$50,000 $150,000 $200,000
35,000
10,000
10,000 45,000
Additional investments during year 10,000
$50,000 $160,000 $210,000
47,500 32,500 80,000
$97,500 $192,500 $290,000
Kelly and ArthurStatement of Partners’ Equity
For Year Ended December 31, 20--
Replaces the
statement of
owner’sequity
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FINANCIAL STATEMENTSFINANCIAL STATEMENTS
B. K. Kelly, capital
Total partners’ equity
$ 62,500
182,500S. B. Arthur, capital
$245,000
Partners’ Equity
Owner’s equity is nowpartners’ equity
Kelly and ArthurBalance Sheet (Partial)
December 31, 20--
5
Describe the actions that
result in the dissolution of
a partnership and account
for the dissolution.
DISSOLUTION OF A PARTNERSHIPDISSOLUTION OF A PARTNERSHIP
• Any change in the members of the partnership results in dissolution– Does not imply that business
operations will halt– A new partnership agreement is
created– Can be caused by:
• Admitting a new partner• Death or withdrawal of a partner• Bankruptcy
ADMITTING A NEW PARTNERADMITTING A NEW PARTNER
• A new partner may buy into the business in three ways:
– By purchasing an interest directly from existing partners
– By making a cash investment in the business
– By contributing assets from an existing business
ADMITTING A NEW PARTNERADMITTING A NEW PARTNER
EXAMPLE: Morning and Knight admit Sunny Noon as a new partner as of July 1, 20--, when Morning and Knight have
capital interests of $30,000 and $20,000, respectively. Noon pays
$12,000 to Morning for one-third of her interest and $12,000 to Knight for one-
half of his interest. The payments go to the
partnersdirectly, not the business.
ADMITTING A NEW PARTNERADMITTING A NEW PARTNER
EXAMPLE: Morning and Knight admit Sunny Noon as a new partner as of July 1, 20--, when Morning and Knight have
capital interests of $30,000 and $20,000, respectively. Noon pays
$12,000 to Morning for one-third of her interest and $12,000 to Knight for one-
half of his interest. Morning, Capital 1/3
$30,000 1/3
Noon buys $10,000 ofMorning’s equity.
ADMITTING A NEW PARTNERADMITTING A NEW PARTNER
EXAMPLE: Morning and Knight admit Sunny Noon as a new partner as of July 1, 20--, when Morning and Knight have
capital interests of $30,000 and $20,000, respectively. Noon pays
$12,000 to Morning for one-third of her interest and $12,000 to Knight for one-
half of his interest. Knight, Capital 1/2
$20,000 1/2
Noon buys $10,000 ofKnight’s equity.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Donna Morning, Capital 10,000
Morning’s capital account is reduced
by the amount sold to Sunny Noon.
20--July 1
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Donna Morning, Capital 10,000
10,000Larry Knight, Capital
20,000Sunny Noon, Capital
Knight’s capital account is reduced
by the ½ interest he sold to Noon.A capital account is created for
Noon.
20--July 1
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Donna Morning, Capital 10,000
10,000Larry Knight, Capital
20,000Sunny Noon, Capital
The $12,000 paid to eachpartner is not recorded
on the partnership books.
20--July 1
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 25,000
25,000Sunny Noon, Capital
If Noon had paid $25,000directly to the partnership…
20--July 1
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ADMITTING A NEW PARTNER ADMITTING A NEW PARTNER
Assets LiabilitiesCash $ 5,000Accts. receivable $14,290Less allow. forbad debts 1,078 13,212Mdse. inv. 27,290
Total assets $45,502
Notes payable $9,048Accounts payable 7,550Total liabilities $16,598
Owner’s EquityNoon, capital 28,904
$45,502Total liab. & O.E.If Noon has a business that
thenew partnership will take
over...
Sunny Noon’s GolfBalance Sheet June 30, 20--
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 5,000
Accounts Receivable
No adjustment is necessarysince Noon has no
knowledgeof any uncollectible
accounts.
20--July 1
14,290
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 5,000
Accounts Receivable
No adjustment is necessarysince Noon has been
using the FIFO method.
20--July 1
14,290
Merchandise Inventory 27,290
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 5,000
Accounts Receivable
20--July 1
14,290
Merchandise Inventory 27,290
Allowance for Bad Debts 1,078
Notes Payable 9,048
Accounts Payable 7,550
Sunny Noon, Capital 28,904
WITHDRAWAL OF A PARTNERWITHDRAWAL OF A PARTNER
• A partner may retire and withdraw assets equal to, less than, or greater than the amount of his or her interest in the partnership
– Determined after:• All profits and losses are allocated and the
books are closed
WITHDRAWAL OF A PARTNERWITHDRAWAL OF A PARTNER
EXAMPLE: Many years later, Sunny Noon decides to retire. The partners have
agreed to the withdrawal of cash equal to the amount of Noon’s equity in the
assets of the partnership.
Donna Morning
45,000
Sunny Noon will take home$40,000 cash.
Capital account balances:
$55,000Sunny Noon 40,000
Larry Knight
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Her capital account is closed out.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
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5
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9
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Sunny Noon, Capital 40,000
The other capital accountsare not affected.
Cash 40,000
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
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Sunny Noon, Capital 40,000
What if Sunny agreesto only $30,000 cash?
Cash 40,000
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
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Sunny Noon, Capital 40,000
Sunny’s capital accountis closed out.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
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Sunny Noon, Capital 40,000
But cash received is lessthan the capital balance.
The difference is split between
the remaining partners.
Cash 30,000
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
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9
10
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Sunny Noon, Capital 40,000
Cash 30,000
Donna Morning, Capital 5,500
Remaining capital = $100,000($55,000 + $45,000)
Morning has 55% interest.She receives 55% of the $10,000
difference.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
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9
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Sunny Noon, Capital 40,000
Cash 30,000
Donna Morning, Capital
Larry Knight, Capital
5,500
4,500
Knight receives 45% of the difference.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
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8
9
10
11
Sunny Noon, Capital 40,000
Cash 30,000
Donna Morning, Capital
Larry Knight, Capital
5,500
4,500
If Noon received $45,000 cash($5,000 more than her capital
balance)…
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Cash 45,000
Donna Morning, Capital
Larry Knight, Capital
2,750
2,250
The remaining partners contribute their capital to
make the $5,000 difference.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Cash 45,000
Donna Morning, Capital
Larry Knight, Capital
2,750
2,250
One last alternative…Sunny sells her interest
in the business to Donna.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
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10
11
Sunny Noon, Capital 40,000
Donna Morning, Capital 40,000
The cash paid by Donna Morning to Sunny Noon is a
personal transaction between the two partners. Noon’s capital account is
closed and Morning’s capital account is credited for
$40,000.
5
Describe how a
partnership is liquidated
and prepare associated
entries and a statement of
partnership liquidation.
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
• Assets are sold
• Liabilities are paid
• Remaining cash and assets are distributed to the partners
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain.Cash
220,000
$ 10,000Inventory 120,000Other AssetsLiabilities $ 80,000D. Morning, Capital 95,000L. Knight, Capital 120,000S. Noon, Capital 55,000
Noncash assets are
sold for $370,000.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 370,000
Inventory 120,000
Other Assets 220,000
Gain on Sale of Assets 30,000
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 370,000
Inventory 120,000
Other Assets 220,000
Gain on Sale of Assets 30,000
Gain on Sale of Assets 30,000
D. Morning, Capital 10,000
L. Knight, Capital 10,000
S. Noon, Capital 10,000
The gain is shared equallyby the partners.
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain.
0Cash
0
$380,000
Other AssetsInventory
Cash is now $380,000 ($10,000 + $370,000),
Inventory and Other Assets are now zero.
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain. Cash
0
$380,000Inventory 0Other AssetsLiabilities $ 80,000D. Morning, Capital 105,000 95,000
+ 10,000
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain. Cash
0
$380,000Inventory 0Other AssetsLiabilities $ 80,000D. Morning, Capital 105,000L. Knight, Capital 130,000
120,000+ 10,000
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain.Cash
0
$380,000Inventory 0Other AssetsLiabilities $ 80,000D. Morning, Capital 105,000L. Knight, Capital 130,000S. Noon, Capital 65,000
55,000+ 10,000
Liabilitiesare paid
off.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Liabilities 80,000
Cash 80,000
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain. Cash
0
$300,000Inventory 0Other AssetsLiabilities $ 0D. Morning, Capital 105,000L. Knight, Capital 130,000S. Noon, Capital 65,000
Remaining cash = Capital account balances
Cash is distributed to partners.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
D. Morning, Capital 105,000
Cash 300,000
L. Knight, Capital 130,000
S. Noon, Capital 65,000
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain. Cash
0
$0Inventory 0Other AssetsLiabilities $0D. Morning, Capital 0L. Knight, Capital 0S. Noon, Capital 0
The partnership is liquidated!
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain. Cash
220,000
$ 10,000Inventory 120,000Other AssetsLiabilities $ 80,000D. Morning, Capital 95,000L. Knight, Capital 120,000S. Noon, Capital 55,000
If these assets had been sold
for only $295,000…
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 295,000
Inventory 120,000
Other Assets 220,000
Loss on Sale of Assets 45,000
There is a $45,000 loss to be
allocated to the partners.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 295,000
Inventory 120,000
Other Assets 220,000
Loss on Sale of Assets 45,000
D. Morning, Capital 15,000
L. Knight, Capital 15,000
S. Noon, Capital 15,000
Loss on Sale of Assets 45,000
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain. Cash
0
$305,000Inventory 0Other AssetsLiabilities $ 80,000D. Morning, Capital 80,000L. Knight, Capital 105,000S. Noon, Capital 40,000
Liabilitiesare paid
off.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Liabilities 80,000
Cash 80,000
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain.Cash
0
$225,000Inventory 0Other AssetsLiabilities $ 0D. Morning, Capital 80,000L. Knight, Capital 105,000S. Noon, Capital 40,000
Cash is paid to the
partners.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
D. Morning, Capital 80,000
Cash 225,000
L. Knight, Capital 105,000
S. Noon, Capital 40,000
LIQUIDATION OF A PARTNERSHIPLIQUIDATION OF A PARTNERSHIP
EXAMPLE: After many years of operations, the partnership is to be liquidated. After closing entries, the
following accounts remain. Cash
0
$0Inventory 0Other AssetsLiabilities $0D. Morning, Capital 0L. Knight, Capital 0S. Noon, Capital 0
The partnership
is liquidated!