chapter 12 accounting for partnerships and limited
TRANSCRIPT
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
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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.
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
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3
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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%
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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)
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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.
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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.
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
Supporting calculations for the bonus:
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
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
Supporting calculations for the bonus:
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
Supporting calculations for the bonus:
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.
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
For the Year Ended December 31, 20Y5
Dennis RandyBen
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CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12-15 (Concluded)
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%
12-19© 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
Ex. 12-17 (Concluded)
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%
=
=
12-20© 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
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.
12-21© 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
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
** $15,000 × 1/3
Dr.
*
*
* *
12-22© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CH
AP
TE
R 1
2
A
ccou
ntin
g fo
r P
artn
ersh
ips
and
Lim
ited
Liab
ility
Com
pani
es
Ex.
12-
23
No
nca
shG
old
Po
rter
Sim
s
Cas
hA
sset
sL
iab
iliti
es(3
/6)
(2/6
)(1
/6)
Bal
ance
s b
efo
re r
ealiz
atio
n$
56,0
00$9
6,00
0$3
2,00
0$5
5,00
0$4
5,00
0$2
0,00
0S
ale
of
asse
ts a
nd
div
isio
n o
f lo
ss+
90,0
00–9
6,00
0—
–3,0
00–2
,000
–1,0
00B
alan
ces
afte
r re
aliz
atio
n$1
46,0
00$
0$3
2,00
0$5
2,00
0$4
3,00
0$1
9,00
0P
aym
ent
of
liab
iliti
es–3
2,00
0—
–32,
000
——
—
Bal
ance
s af
ter
pay
men
t o
f lia
bili
ties
$114
,000
$0
$0
$52,
000
$43,
000
$19,
000
Cas
h d
istr
ibu
ted
to
par
tner
s–1
14,0
00—
—–5
2,00
0–4
3,00
0–1
9,00
0F
inal
bal
ance
s$
0$
0$
0$
0$
0$
0
+=
++
+
GO
LD
, PO
RT
ER
, AN
D S
IMS
Sta
tem
ent
of
Par
tner
ship
Liq
uid
atio
nF
or
the
Per
iod
En
din
g J
uly
1–2
9
12-2
3©
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.
CH
AP
TE
R 1
2
A
ccou
ntin
g fo
r P
artn
ersh
ips
and
Lim
ited
Liab
ility
Com
pani
es
Ex.
12-
24
a.
No
nca
shL
este
rT
orr
esH
ears
t
Cas
hA
sset
sL
iab
iliti
es(2
/5)
(2/5
)(1
/5)
Bal
ance
s b
efo
re r
ealiz
atio
n$
26,0
00$1
46,0
00$3
5,00
0$4
9,00
0$6
1,00
0$2
7,00
0S
ale
of
asse
ts a
nd
div
isio
n o
f g
ain
+15
8,00
0–1
46,0
00—
+4,
800
+4,
800
+2,
400
Bal
ance
s af
ter
real
izat
ion
$184
,000
$0
$35,
000
$53,
800
$65,
800
$29,
400
Pay
men
t o
f lia
bili
ties
–35,
000
—–3
5,00
0—
——
Bal
ance
s af
ter
pay
men
t o
f lia
bili
ties
$149
,000
$0
$0
$53,
800
$65,
800
$29,
400
Cas
h d
istr
ibu
ted
to
mem
ber
s–1
49,0
00—
—–5
3,80
0–6
5,80
0–2
9,40
0F
inal
bal
ance
s$
0$
0$
0$
0$
0$
0
b.
Les
ter,
Mem
ber
Eq
uit
y T
orr
es, M
emb
er E
qu
ity
Hea
rst,
Mem
ber
Eq
uit
y C
ash
c.T
he
inco
me-
an
d lo
ss-s
har
ing
rat
io is
on
ly u
sed
to
dis
trib
ute
th
e g
ain
or
loss
on
th
e re
aliz
atio
n o
f as
set
sale
s.
It is
no
t u
sed
fo
r th
e fi
nal
dis
trib
uti
on
. Th
e fi
nal
dis
trib
uti
on
is b
ased
up
on
th
e cr
edit
bal
ance
s in
th
e m
emb
er
equ
ity
acco
un
ts a
fter
all
gai
ns
and
loss
es o
n r
ealiz
atio
n h
ave
bee
n d
ivid
ed a
nd
an
y p
artn
er d
efic
ien
cies
hav
e b
een
pai
d o
r al
loca
ted
.
Mem
ber
Eq
uit
y
=+
++
65,8
0029
,400
149,
000
53,8
00
AR
CA
DIA
SA
LE
S, L
LC
Sta
tem
ent
of
LL
C L
iqu
idat
ion
Fo
r th
e P
erio
d A
ug
ust
1–3
1
+ 12-2
4©
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.
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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)
For the Year Ended December 31, 20Y4
$ 73,000—
Allison
12-25© 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
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.
12-26© 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
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
**
12-27© 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
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
12-28© 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
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
12-29© 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
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
For the Year Ended December 31, 20Y3
LAMBERT AND YOSTIncome Statement
For the Year Ended December 31, 20Y3
$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
***
12-30© 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
Prob. 12-3A (Concluded)
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
Total liabilities $ 33,000
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
12-31© 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
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
*
12-32© 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
Prob. 12-4A (Concluded)
3.
Current assets:Cash1 $ 53,000Accounts receivable $40,000Less allowance for doubtful accounts 2,000 38,000
Merchandise inventory 76,600Prepaid insurance 3,000
Total current assets $170,600 Property, plant, and equipment:
Equipment 155,700 Total assets $326,300
Current liabilities:Accounts payable $ 21,300Notes payable 35,000
Total liabilities $ 56,300
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 – $70,000
MOSHREF, HOLLINS, AND ANDERSONBalance Sheet
July 1, 20Y7
Assets
Partners’ Equity
Liabilities
12-33© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CH
AP
TE
R 1
2
A
ccou
ntin
g fo
r P
artn
ersh
ips
and
Lim
ited
Liab
ility
Com
pani
es
Pro
b. 1
2-5A
1.
No
nca
shG
erlo
ffC
hu
Jew
ett
Cas
hA
sset
sL
iab
iliti
es(2
/4)
(1/4
)(1
/4)
Bal
ance
s b
efo
re r
ealiz
atio
n$
5,20
0$5
5,90
0$1
5,00
0$1
9,30
0$4
,500
$22,
300
a.S
ale
of
asse
ts a
nd
div
isio
n o
f lo
ss+
34,3
00–5
5,90
0—
–10,
800
–5,4
00–5
,400
Bal
ance
s af
ter
real
izat
ion
$39,
500
$0
$15,
000
$8,
500
$(9
00)
$16,
900
b.
Pay
men
t o
f lia
bili
ties
–15,
000
—–1
5,00
0—
——
Bal
ance
s af
ter
pay
men
t o
f lia
bili
ties
$24,
500
$0
$0
$8,
500
$(9
00)
$16,
900
c.R
ecei
pt
of
def
icie
ncy
+90
0—
——
+90
0—
Bal
ance
s$2
5,40
0$
0$
0$
8,50
0$
0$1
6,90
0d
.C
ash
dis
trib
ute
d t
o p
artn
ers
–25,
400
——
–8,5
00—
–16,
900
Fin
al b
alan
ces
$0
$0
$0
$0
$0
$0
2a.
Will
iam
Ger
loff
, Cap
ital
Co
urt
ney
Jew
ett,
Cap
ital
Josh
ua
Ch
u, C
apit
al
Th
e $9
00 d
efic
ien
cy o
f C
hu
wo
uld
be
div
ided
bet
wee
n t
he
oth
er p
artn
ers,
Ger
loff
an
d J
ewet
t, in
th
eir
inco
me-
shar
ing
rat
io(2
:1, r
esp
ecti
vely
). T
her
efo
re, G
erlo
ff w
ou
ld a
bso
rb t
wo
-th
ird
s o
f th
e $9
00 d
efic
ien
cy, o
r $6
00, a
nd
Jew
ett
wo
uld
ab
sorb
o
ne-
thir
d o
f th
e $9
00 d
efic
ien
cy, o
r $3
00.
b.
Will
iam
Ger
loff
, Cap
ital
*C
ou
rtn
ey J
ewet
t, C
apit
al**
Cas
h
* $
8,50
0 –
$600
** $
16,9
00 –
$30
0
300
16,6
007,
900
GE
RL
OF
F, C
HU
, AN
D J
EW
ET
TS
tate
men
t o
f P
artn
ersh
ip L
iqu
idat
ion
Fo
r P
erio
d F
ebru
ary
3–28
600
+=
Cap
ital
++
+
900
24,5
00
12-3
4©
201
8 C
enga
ge L
earn
ing.
All
Rig
hts
Res
erve
d. M
ay n
ot b
e sc
anne
d, c
opie
d or
dup
lica
ted,
or
post
ed to
a p
ubli
cly
acce
ssib
le w
ebsi
te, i
n w
hole
or
in p
art.
CH
AP
TE
R 1
2
A
ccou
ntin
g fo
r P
artn
ersh
ips
and
Lim
ited
Liab
ility
Com
pani
es
Pro
b. 1
2-6A
1.a.
No
nca
shS
ails
Wel
chG
reen
ber
g
Cas
hA
sset
sL
iab
iliti
es(2
/5)
(2/5
)(1
/5)
Bal
ance
s b
efo
re r
ealiz
atio
n$
32,0
00$1
28,0
00$2
0,00
0$5
8,00
0$7
2,00
0$1
0,00
0S
ale
of
asse
ts a
nd
div
isio
n o
f g
ain
+15
6,00
0–1
28,0
00—
+11
,200
+11
,200
+5,
600
Bal
ance
s af
ter
real
izat
ion
$188
,000
$0
$20,
000
$69,
200
$83,
200
$15,
600
Pay
men
t o
f lia
bili
ties
–20,
000
—–2
0,00
0—
——
Bal
ance
s af
ter
pay
men
t o
f lia
bili
ties
$168
,000
$0
$0
$69,
200
$83,
200
$15,
600
Cas
h d
istr
ibu
ted
to
par
tner
s–1
68,0
00—
—–6
9,20
0–8
3,20
0–1
5,60
0F
inal
bal
ance
s$
0$
0$
0$
0$
0$
0
SA
ILS
, WE
LC
H, A
ND
GR
EE
NB
ER
G
Sta
tem
ent
of
Par
tner
ship
Liq
uid
atio
nF
or
Per
iod
No
vem
ber
1–3
0C
apit
al
++
=+
+
12-3
5©
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.
CH
AP
TE
R 1
2
A
ccou
ntin
g fo
r P
artn
ersh
ips
and
Lim
ited
Liab
ility
Com
pani
es
Pro
b. 1
2-6A
(C
on
clu
ded
)
1.b
.
No
nca
shS
ails
Wel
chG
reen
ber
g
Cas
hA
sset
sL
iab
iliti
es(2
/5)
(2/5
)(1
/5)
Bal
ance
s b
efo
re r
ealiz
atio
n$3
2,00
0$1
28,0
00$2
0,00
0$5
8,00
0$7
2,00
0$1
0,00
0S
ale
of
asse
ts a
nd
div
isio
n o
f lo
ss+
55,0
00–1
28,0
00—
–29,
200
–29,
200
–14,
600
Bal
ance
s af
ter
real
izat
ion
$87,
000
$0
$20,
000
$28,
800
$42,
800
$(4
,600
)P
aym
ent
of
liab
iliti
es–2
0,00
0—
–20,
000
——
—
Bal
ance
s af
ter
pay
men
t o
f lia
bili
ties
$67,
000
$0
$0
$28,
800
$42,
800
$(4
,600
)R
ecei
pt
of
def
icie
ncy
+4,
600
——
——
+4,
600
Bal
ance
s$7
1,60
0$
0$
0$2
8,80
0$4
2,80
0$
0C
ash
dis
trib
ute
d t
o p
artn
ers
–71,
600
——
–28,
800
–42,
800
—F
inal
bal
ance
s$
0$
0$
0$
0$
0$
0
2.a.
Sai
ls, C
apit
alW
elch
, Cap
ital
Gre
enb
erg
, Cap
ital
Th
e $4
,600
def
icie
ncy
of
Gre
enb
erg
wo
uld
be
div
ided
bet
wee
n t
he
oth
er p
artn
ers,
Sai
ls a
nd
Wel
ch, i
n t
hei
r in
com
e-sh
arin
g r
atio
(1:
1, r
esp
ecti
vely
). T
her
efo
re, S
ails
wo
uld
ab
sorb
on
e-h
alf
of
the
$4,6
00 d
efic
ien
cy, o
r $2
,300
, an
d W
elch
w
ou
ld a
bso
rb o
ne-
hal
f o
f th
e $4
,600
def
icie
ncy
, or
$2,3
00.
b.
Sai
ls, C
apit
al*
Wel
ch, C
apit
al**
Cas
h
* $
28,8
00 –
$2,
300
** $
42,8
00 –
$2,
300
67,0
00
=+
++
2,30
02,
300
+
SA
ILS
, WE
LC
H, A
ND
GR
EE
NB
ER
G
Sta
tem
ent
of
Par
tner
ship
Liq
uid
atio
n
Cap
ital
26,5
0040
,500
Fo
r P
erio
d N
ove
mb
er 1
–30
4,60
0
12-3
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.
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
Total current assets $163,000 Property, plant, and equipment:
Equipment 63,400 Total assets $226,400
Current liabilities:Accounts payable $ 23,400Notes payable 15,000
Total liabilities $ 38,400
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
*
**
12-37© 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
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
12-38© 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
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
12-39© 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
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
For the Year Ended December 31, 20Y2
$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
***
12-40© 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
Prob. 12-3B (Concluded)
3.
Current assets:Cash $ 70,300Accounts receivable 33,600Supplies 5,800
Total current assets $109,700 Property, plant, and equipment:
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
Total liabilities $ 22,400
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
12-41© 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
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
*
12-42© 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
Prob. 12-4B (Concluded)
3.
Current assets:Cash1 $44,300Accounts receivable $18,000Less allowance for doubtful accounts 900 17,100
Merchandise inventory 46,800Prepaid insurance 1,200
Total current assets $109,400 Property, plant, and equipment:
Equipment 64,500 Total assets $173,900
Current liabilities:Accounts payable $ 8,900Notes payable 15,000
Total liabilities $ 23,900
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
12-43© 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.
CH
AP
TE
R 1
2
A
ccou
ntin
g fo
r P
artn
ersh
ips
and
Lim
ited
Liab
ility
Com
pani
es
Pro
b. 1
2-5B
1.
No
nca
shF
airc
hild
Lo
wes
Ho
war
d
Cas
hA
sset
sL
iab
iliti
es(1
/4)
(1/4
)(2
/4)
Bal
ance
s b
efo
re r
ealiz
atio
n$2
3,50
0$8
4,50
0$2
2,00
0$4
2,00
0$
7,50
0$3
6,50
0a.
Sal
e o
f as
sets
an
d d
ivis
ion
of
loss
+48
,500
–84,
500
—–9
,000
–9,0
00–1
8,00
0B
alan
ces
afte
r re
aliz
atio
n$7
2,00
0$
0$2
2,00
0$3
3,00
0$(
1,50
0)$1
8,50
0b
.P
aym
ent
of
liab
iliti
es–2
2,00
0—
–22,
000
——
—B
alan
ces
afte
r p
aym
ent
of
liab
iliti
es$5
0,00
0$
0$
0$3
3,00
0$(
1,50
0)$1
8,50
0c.
Rec
eip
t o
f d
efic
ien
cy+
1,50
0—
——
+1,
500
—B
alan
ces
$51,
500
$0
$0
$33,
000
$0
$18,
500
d.
Cas
h d
istr
ibu
ted
to
par
tner
s–5
1,50
0—
—–3
3,00
0—
–18,
500
Fin
al b
alan
ces
$0
$0
$0
$0
$0
$0
2.a.
Zac
h F
airc
hild
, Cap
ital
Am
ber
Ho
war
d, C
apit
alA
ust
in L
ow
es, C
apit
al
Th
e $1
,500
def
icie
ncy
of
Lo
wes
wo
uld
be
div
ided
bet
wee
n t
he
oth
er p
artn
ers,
Fai
rch
ild a
nd
Ho
war
d, i
n t
hei
r in
com
e-sh
arin
g r
atio
(1:
2 re
spec
tive
ly).
Th
eref
ore
, Fai
rch
ild w
ou
ld a
bso
rb o
ne-
thir
d o
f th
e $1
,500
def
icie
ncy
, or
$500
,an
d H
ow
ard
wo
uld
ab
sorb
tw
o-t
hir
ds
of
the
$1,5
00 d
efic
ien
cy, o
r $1
,000
.
b.
Zac
h F
airc
hild
, Cap
ital
*A
mb
er H
ow
ard
, Cap
ital
**C
ash
* $
33,0
00 –
$50
0**
$18
,500
– $
1,00
0
32,5
0017
,500
50,0
00
1,50
0
500
1,00
0
++
+
FA
IRC
HIL
D, L
OW
ES
, AN
D H
OW
AR
DS
tate
men
t o
f P
artn
ersh
ip L
iqu
idat
ion
Fo
r th
e P
erio
d A
pri
l 10–
30C
apit
al
+=
12-4
4©
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.
CH
AP
TE
R 1
2
A
ccou
ntin
g fo
r P
artn
ersh
ips
and
Lim
ited
Liab
ility
Com
pani
es
Pro
b. 1
2-6B
1.a.
No
nca
shC
hap
elle
Ro
ckP
ryo
r
Cas
hA
sset
sL
iab
iliti
es(1
/5)
(2/5
)(2
/5)
Bal
ance
s b
efo
re r
ealiz
atio
n$
65,0
00$1
67,0
00$3
0,00
0$1
4,00
0$1
02,0
00$
86,0
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
Bal
ance
s af
ter
real
izat
ion
$282
,000
$0
$30,
000
$24,
000
$122
,000
$106
,000
Pay
men
t o
f lia
bili
ties
–30,
000
—–3
0,00
0—
——
Bal
ance
s af
ter
pay
men
t o
f lia
bili
ties
$252
,000
$0
$0
$24,
000
$122
,000
$106
,000
Cas
h d
istr
ibu
ted
to
par
tner
s–2
52,0
00—
—–2
4,00
0–1
22,0
00–1
06,0
00F
inal
bal
ance
s$
0$
0$
0$
0$
0$
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
++
=+
+
12-4
5©
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.
CH
AP
TE
R 1
2
A
ccou
ntin
g fo
r P
artn
ersh
ips
and
Lim
ited
Liab
ility
Com
pani
es
Pro
b. 1
2-6B
(C
on
clu
ded
)
1.b
.
No
nca
shC
hap
elle
Ro
ckP
ryo
r
Cas
hA
sset
sL
iab
iliti
es(1
/5)
(2/5
)(2
/5)
Bal
ance
s b
efo
re r
ealiz
atio
n$
65,0
00$1
67,0
00$3
0,00
0$1
4,00
0$1
02,0
00$8
6,00
0S
ale
of
asse
ts a
nd
div
isio
n o
f lo
ss+
72,0
00–1
67,0
00—
–19,
000
–38,
000
–38,
000
Bal
ance
s af
ter
real
izat
ion
$137
,000
$0
$30,
000
$(5
,000
)$
64,0
00$4
8,00
0P
aym
ent
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es–3
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–30,
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——
—
Bal
ance
s af
ter
pay
men
t o
f lia
bili
ties
$107
,000
$0
$0
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)$
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8,00
0R
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pt
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+5,
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——
+5,
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——
Bal
ance
s$1
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0C
ash
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——
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inal
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ance
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0
2.a.
Ro
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
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tner
s, R
ock
an
d P
ryo
r, in
th
eir
inco
me-
shar
ing
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io (
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pec
tive
ly).
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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.
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
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
12-47© 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
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
=
*
12-48© 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
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.
12-49© 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
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.
12-50© 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.