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Chapter 16 PARTNERSHIPS — FORMATION, OPERATIONS, AND CHANGES IN OWNERSHIP INTERESTS Answers to Questions 1
2
A partnership has a characteristics as follows: a.
Owned by two or more persons. It can’t be said as a partnership if it is owned by a single person.
b.
Mutual agency. It means every partner act as an agent in the partnership. The action of every partner on behalf of the partnership can bind the other partners.
c.
Unlimited liability. Every partner is liable for the partnership debts. If the partnership asset is not sufficient to retire the debts, partners should use their personal asset to retire the partnership debts.
Articles of partnership explain the agreement of partners in the partnership. The article should include the agreement of: d.
The types of products and services to be provided and other details of the business’s operations. Example: a restaurant partnership provides variety of traditional foods and drinks to the customers.
e.
Each partner’s rights and responsibilities in conducting the business. Example: an active partner has responsibilities to become the managers of the partnership.
f.
Each partner’s initial investment including the value assigned to noncash asset investments. Example: Partner A initially invests $ 5,000 cash and $ 5,000 in the form of vehicle.
g.
Additional investment conditions. Example: Each partner may add more investment in the form of cash or other assets needed by the partnerships.
h.
Asset withdrawal provisions. Example: Each partner has a right to withdraw $100 cash each month credited to the partner capital account.
i.
Profit- and loss-sharing formulas. Example: Profit and loss are shared based on the average capital balance of each partner.
j.
Procedures for dissolving the partnership. Example: The partnership will be dissolved if there is new partner or any of the partners withdraw.
3
Investment in a partnership can be in the form of non-cash assets. The non-cash assets should be appraised to determine the value that should be recognized by the partnership. It should be appraised by independent appraisal. However, as a practical matter, it may be determined by the agreement of the partners.
4
Salary and interest allowances are included in some partnership agreements in order to reward partners for the time and effort that they devote to partnership business (salary allowances) and for capital investments (interest allowances) that they make in the business. Copyright © 2015 Pearson Education Limited
16-2
Partnerships—Formation, Operations and Changes in Ownership Interests
5
Salary allowances to partners are not expenses of a partnership. Rather, they are a means of recognizing the efforts of individual partners in the division of partnership income.
6
When profits are divided in the ratio of capital balances, capital balances should be computed on the basis of weighted average capital balances in the absence of evidence that another interpretation of capital balances is intended by the partners.
7
An individual partner may have a loss from his share of partnership operating activities even though the partnership has income. This situation results if priority allocations to other partners exceed partnership net income. For example, if net income for the A and B Partnership is $5,000 and profits are divided equally after a salary allowance of $8,000 to A, A will have partnership income of $6,500 and B will have a partnership loss of $1,500.
8
Partnership dissociation under the Uniform Partnership Act is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business, as distinguished from the winding up of the business. Thus, the assignment of a partnership interest to a third party by one of the partners does not, by itself, dissolve the partnership because the assignee does not become a partner unless accepted as a partner by the continuing partners.
9
The sale of a partnership interest to a third party dissolves the old partnership if the continuing partners accept the third party purchaser as their partner. In this case, the relation among the partners is changed and a new partnership agreement is necessary.
10
When a new partner acquires an interest by purchase from existing partners, the partnership receives no new assets because the payment for the new partner’s interest is distributed to the old partners. Alternatively, an investment in a partnership increases the net assets of the partnership. This difference is important in accounting for the admission of a new partner.
11
The admission of a new partner may be recorded by the goodwill approach (or revaluation approach) or by the bonus approach (or nonrevaluation approach).
12
The goodwill procedure for recording the admission of a new partner is best described as a revaluation approach because identifiable assets and liabilities that are over or undervalued are adjusted to their fair values before the unidentifiable asset goodwill is recorded. For example, if a new partner’s investment reflects the fact that land owned by the old partnership is undervalued, it would be misleading to record the amount of revaluation as goodwill, rather than as a revaluation of the land account.
13
A bonus procedure for recording an investment in a partnership involves adjusting the partnership capital account to the extent necessary to meet the new partnership agreement without a revaluation of the assets and liabilities of the old partnership. If a new partner receives a capital credit in excess of his or her investment, the excess is a bonus to the new partner. A bonus to a new partner is charged against the old partners’ capital balances in relation to their old profit sharing ratios. If a new partner’s investment exceeds his or her capital credit, the excess is a bonus to the old partners. A bonus to the old partners is credited to the old partners’ capital balances in accordance with the old partners’ profit sharing ratios.
14
The amounts received by the individual partners in final liquidation will be the same under the bonus and goodwill procedures provided that the relative profit and loss sharing ratios of the old partners remain unchanged in the new partnership and that the new partners’ capital interest and profit and loss sharing ratio are aligned. Copyright © 2015 Pearson Education Limited
Chapter 16
15
16-3
Parts a and b assume that the partnership assets are to be revalued upon the admission of Bob into the partnership. Goodwill would be recorded if identifiable assets and liabilities are equal to their fair values and 1. $10,000 ¸ 25% > $10,000 + old capital; or 2. Old capital ¸ 75% > $10,000 + old capital; or 3. An independent assessment of earning power or other factors indicate goodwill. Old partnership assets would be written down if 1. $10,000 ¸ 25% < $10,000 + old capital; or 2. Old capital ¸ 75% < $10,000 + old capital; or 3. An independent assessment of earning power or other factors indicate that partnership assets are overvalued. Parts c and d assume that partnership assets are not to be revalued upon the admission of Bob into the partnership. A bonus to the old partners would be recorded if 25% ´ ($10,000 + old capital) is less than $10,000. A bonus to Bob would be recorded if 25% ´ ($10,000 + old capital) is greater than $10,000.
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16-4
Partnerships—Formation, Operations and Changes in Ownership Interests
SOLUTIONS TO EXERCISES Solution E16-1 1.
Initial investments of partners are recorded at fair value instead of cost.
Cash Land Truck Computer Inventory Total Percentage
Michelle $ 450,000
Devina $ 300,000 $ 10,000,000
$ 6,500,000
$ 6,950,000 37.07%
$ 1,300,000 $ 200,000 $ 11,800,000 62.93%
Total $ 750,000 $ 10,000,000 $ 6,500,000 $ 1,300,000 $ 200,000 $ 18,750,000 100.00%
Using bonus approach, each partner will have equal capital balance from the total investments. Michelle capital ($18,750,000/2) Devina capital ($18,750,000/2)
$9,375,000 $9,375,000
2. The partnership fair value can be determined from partner that doesn’t bring goodwill to the partnership, which is Devina. Partnership fair value ($11,800,000 / 50%)
$23,600,000
Each partner will have equal capital balance Michelle capital ($23,600,000/2) Devina capital ($23,600,000/2)
$11,800,000 $11,800,000
3. Total partnership equity after revaluation Total partnership equity before revaluation Goodwill
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$23,600,000 ($18,750,000) $ 4,850,000
Chapter 16
16-5
Solution E16-2 Computation of Bev’s bonus: Let B B B 1.1B B
= = = = =
bonus 10% ´ ($198,000 - B) $19,800 - .1B $19,800 $18,000 Schedule to Allocate Partnership Income Arn
Net income to distribute Bonus to Bev Remainder to divide Divided 40:40:20 Income allocation
$198,000 (18,000) 180,000 (180,000) 0
Bev
Car
$18,000 $72,000 $72,000
72,000 $90,000
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$ 36,000 $ 36,000
16-6
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-3 Mel 2012 income to divide ($25,000 - $4,000) Salary to Mel Remainder to divide Divided equally 2011 income understatement Divided in the 2011 60:40 ratio Income allocation
$21,000 (18,000) 3,000 (3,000) 0 $ 4,000 (4,000) 0
Dav
$18,000 1,500
$ 1,500
2,400 $21,900
1,600 $ 3,100
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Chapter 16
16-7
Solution E16-4 Schedule to Allocate Partnership Income for 2011 Income to distribute Salary allocation Interest on capital* Loss to divide Divided equally Income to partners *
Balance $28,000 (42,000) (52,000) (66,000) 66,000 0
Dan
Hen
Bai
$
$ 18,000 16,000
$24,000 15,000
--21,000
(22,000) $(1,000)
(22,000) $12,000
(22,000) $17,000
Interest on average capital:
Dan
January 1, 2011 Balances $200,000 240,000 200,000
Hen
$ 160,000
´ 1 year =
$160,000 ´ 10% =
16,000
Bai
$ 150,000
´ 1 year =
$150,000 ´ 10% =
15,000 $52,000
´ 1/2 year = ´ 1/4 year = ´ 1/4 year =
Average Interest Capital on Capital $100,000 60,000 50,000 $21,000 $210,000 ´ 10% =
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16-8
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-5 1. Capital balances for both partners:
Wero Capital balances January 1, 2013 Additional investments March 1
$7,500,000.00 $400,000.00
Capital balances March 1 Additional investments May 1
$7,900,000.00
Capital balances May 1 Withdrawal October 1
$7,900,000.00 $(1,300,000.00 )
Amy $6,000,000.0 0 $6,000,000.0 0 $150,000.00 $6,150,000.0 0
Capital balances October 1 Additional investments November 31
$6,600,000.00
$6,150,000.0 0
Capital balances November 31 Additional investments December 31
$6,600,000.00
$700,000.00 $6,850,000.0 0
Capital balances December 31
$8,600,000.00
$2,000,000.00
Weighted average capital of Wero capital $7,500,000 x 2 / 12 $7,900,000 x 7 / 12 $6,600,000 x 3 / 12 $8,600,000 x 0 /12 Weighted average $6,000,000 x 4 / $6,150,000 x 7 / $6,850,000 x 1 /
capital of Amy capital 12 12 12
$6,850,000.0 0
$1,250,000 $4,608,333 $1,650,000 $0 $7,508,333 $2,000,000 $3,587,500 $570,833 $6,158,333
2. Profit allocated to Wero ($9,000,000 x $7508,333 / ($7,508,333 + $6,158,333)) Profit allocated to Amy ($9,000,000 x $6,158,333 / ($7,508,333 + $6,158,333))
$4,944,512 $4,055,488
Solution E16-6 1
Ben capital
$350,000 Pet capital Copyright © 2015 Pearson Education Limited
$350,000
Chapter 16
16-9
To record assignment of half of Ben’s capital account to Pet. 2
The total capital of BIG Entertainment Galley remains at $1,480,000. The amount paid by Pet to Ben does not affect the partnership and Pet does not become a partner with the assignment of half of Ben’s interest.
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16-10
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-7 1.
Total equity of partnership before revaluation ($3,000,000 + $2,500,000 + $6,000,000)
$11,500,000
To get capital interest of $4,600,000 (40% x $11,500,000), Ping has to invest for $6,000,000 (goodwill to old partners) Fair value of the partnership ($6,000,000 / 40%) $15,000,000 Total equity of partnership before revaluation $11,500,000 Goodwill $3,500,000 Allocation of goodwill: To Liu ($3,500,000 x 40%) To Ping ($3,500,000 x 60%) Capital balance of each partner: Liu ($3,000,000 + $1,400,000) Wang ($2,500,000 + $2,100,000) Ping 2.
$1,400,000 $2,100,000 $3,500,000 $4,400,000 $4,600,000 $6,000,000
Ping interest in the partnership ($11,500,000 x 40%)
$4,600,000
Total bonus to old partners ($6,000,000 - $4,600,000)
$1,400,000
Capital balance of each partners: Liu ($3,000,000 + (40% x $1,400,000)) Wang ($2,500,000 + (60% x $1,400,000)) Ping ($11,500,000 x 40%)
$3,560,000 $3,340,000 $4,600,000
Total
$11,500,000
Solution E16-8 Journal entries to admit Joh to the Bow/Mon partnership: Goodwill
$ 45,000 Bow capital $ 27,000 Mon capital 18,000 To record goodwill computed as follows: New capital = $75,000 ¸ 1/3 = $225,000 Goodwill = $225,000 new capital - $180,000 old capital = $45,000
Bow capital Mon capital
$ 39,000 36,000
Joh capital $75,000 To record capital transfer to Joh: ($90,000 + $27,000)/3 from Bow and ($90,000 + $18,000)/3 from Mon.
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Chapter 16
16-11
Solution E16-9 1
Investment of $100,000 in partnership with revaluation: Cash Goodwill
$100,000 20,000
Wal capital $120,000 The new partnership valuation is computed as: old capital of $480,000/80% retained interest = $600,000 new capital. Goodwill is computed as: new capital of $600,000 - $580,000 (the old capital plus investment) = $20,000 goodwill. 2
Investment of $140,000 in partnership with revaluation: Goodwill
$80,000 Sip capital $24,000 Jog capital 40,000 Run capital 16,000 New partnership capital is computed on the basis of new investment of $140,000/20% interest = $700,000 new capital. New capital of $700,000 - ($480,000 old capital + $140,000 investment) = $80,000 goodwill.
Cash
$140,000 Wal capital To record Wal’s investment in the partnership.
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$140,000
16-12
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-10 1
Investment of $120,000 in the partnership with no revaluation: $400,000 old capital + $120,000 additional investment = $520,000 Box’s interest = $520,000 ´ 25% = $130,000 Therefore, the old partners are giving a bonus to Box of $10,000. Cash Man capital Eme capital Fot capital
$120,000 3,600 2,400 4,000
Box capital $130,000 To record Box’s admission to a 25% interest in the partnership capital and earnings. Capital accounts after Box’s admission to the partnership: Man Eme Fot Box 2
capital ($140,000 - $3,600) capital ($100,000 - $2,400) capital ($160,000 - $4,000) capital
$136,400 97,600 156,000 130,000 $520,000
The profit and loss sharing ratios of the new partnership will depend on the provisions of the new partnership agreement. If the old partners wish to maintain their old partnership relationship, one possible division would be to reduce each of the old partners ratio by 25% (in other words, a new ratio of 27:18:30:25). However, if the issue is not addressed in the new partnership agreement, the partners will share profits equally, 25:25:25:25, in accordance with the Uniform Partnership Act.
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Chapter 16
16-13
Solution E16-11 Retirement of Nix with revaluation: Goodwill
$140,000 Nix capital (30%) $42,000 Man capital (30%) 42,000 Per capital (40%) 56,000 To record goodwill implied by the excess payment to Nix computed as: ($170,000 - $128,000)/30% = $140,000. Nix capital
$170,000
Cash To record payment to Nix upon his retirement.
$170,000
Solution E16-12 Entry to write-up assets to fair value Assets Bec capital Dee capital Lyn capital Entry to record settlement with Dee Dee capital Bec capital (5/6 ´ $30,000 excess payment) Lyn capital (1/6 ´ $30,000 excess payment) Loan to Dee Cash
$200,000 $100,000 80,000 20,000 $380,000 25,000 5,000 $100,000 310,000
Bec capital ($300,000 + $100,000 - $25,000)
$375,000
Lyn capital ($100,000 + $20,000 - $5,000)
$115,000
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16-14
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-13 1
Income Allocation Schedule Kat Net income Bonus to Kat Remainder Salary allowance Remainder 50/50 split Remainder
2
$30,000 (1,500) 28,500 (25,000) 3,500 (3,500) -0-
Edd
1,500
1,500
10,000
15,000
25,000
1,750 $13,250
1,750 $16,750
3,500 $30,000
Revenue and Expense Summary $30,000 Kat Capital $13,250 Edd Capital $16,750 Allocate partnership net income for the year to the partners. Kat Capital
$15,000 Kat Drawing
Edd Capital
$15,000 $10,000
Edd Drawing Close the drawing accounts to the capital accounts. 3
Total
$10,000
Capital Accounts K & E Partnership Statement of Partners’ Capital For the year ended December 31 2011 Capital balances January 1, 2011 Add: Additional investments Deduct: Withdrawals Deduct: Drawings Add: Net income Capital balances December 31, 2011
Kat $496,750 5,000 0 (15,000) 13,250 $500,000
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Edd $268,250 5,000 0 (10,000) 16,750 $280,000
Chapter 16
16-15
Solution E16-14 1
Valuation of assets and liabilities as implied by excess payment to Box: Building $10,000 Goodwill 40,000 Byd capital $ 15,000 Box capital 10,000 Dar capital 20,000 Fus capital 5,000 To record revaluation of building and goodwill implied by the excess payment to Box on his retirement ($10,000 ¸ 20% = $50,000 revaluation). Box capital
$35,000 Cash $ 35,000 To record cash payment to Box on his retirement from the business.
2
No revaluation; bonus to retiring partner: Box capital $25,000 Byd (30/80) 3,750 Dar (40/80) 5,000 Fus(10/80) 1,250 Cash To record a $10,000 bonus to Box upon retirement.
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$
35,000
16-16
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-15 1
a Bil’s contribution ($20,000 + $60,000 + $15,000 - $30,000) Ken’s contribution Total tangible contributions
$ 65,000 50,000 $115,000
Ken’s contribution $50,000/.4 interest = $125,000 total capital Total capital based on Ken’s contribution $125,000 less amount contributed by Ken and Bil $115,000 = $10,000 goodwill 2
c Jay’s investment of $65,000 is greater than his capital credit of 1/3 of $175,000; thus, there is goodwill to the old partners. New capital = $65,000 ¸ 1/3 = $195,000 New capital of $195,000 - (old capital $110,000 + $65,000 investment) = $20,000 goodwill. Revaluation is recorded: Goodwill (other assets) $20,000 Tho capital (50%) Mar capital (50%) Mar’s capital = $60,000 + $10,000 goodwill = $70,000
$ 10,000 10,000
3
c Total capital ($170,000 + $200,000 + $200,000) = $570,000 Zen’s interest $570,000 ´ 1/3 = $190,000 Therefore, Tin and Web receive a $10,000 bonus, shared equally.
4
c $90,000 investment > 25% ´ ($100,000 + $80,000 + $90,000), thus, there is goodwill to the old partners.
5
New capital $90,000/25% Old capital + new investment $180,000 + $90,000 Goodwill
$360,000 (270,000) $ 90,000
Fin capital $100,000 + (50% ´ $90,000 goodwill) Rho capital $80,000 + (50% ´ $90,000 goodwill) Che capital Total capital
$145,000 125,000 90,000 $360,000
b Payment to Gin at retirement Capital account before recording share of goodwill Gin’s share of goodwill
$200,000 170,000 $ 30,000
Total goodwill for partnership ($30,000/.3)
$100,000
Total assets before Gin’s retirement ($240,000 cash + $360,000 other assets + $100,000 goodwill) Less: Payment to Gin on retirement
$700,000 200,000
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Chapter 16
16-17
Total assets after Gin retires
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$500,000
16-18
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-16 1
a Ton capital Olg capital
$ 30,000 70,000 $100,000
Capital Interest 30% 70%
Income Interest 50% 50%
Since capital and income interests were not aligned at the time of Shi’s purchase, the $40,000 payment to Ton does not provide a basis for revaluation. Thus, half of Ton’s $30,000 capital balance should be transferred to Shi. 2
3
a Implied total valuation of partnership based on Dun’s $60,000 payment to partners ($60,000/.4)
$150,000
Entry to record goodwill: Goodwill Lin capital Que capital
$ 15,000 15,000
Entry to transfer equal capital amounts to Dun: Lin capital $30,000 Que capital 30,000 Dun capital
$ 60,000
Capital accounts after admission of Dun: Lin capital ($50,000 + $15,000 - $30,000) Que capital ($70,000 + $15,000 - $30,000) Dun capital Total capital
$ 35,000 55,000 60,000 $150,000
c Old capital of $120,000 ¸ 2/3 interest retained by old partners = $180,000 capitalization. $180,000 - $170,000 old capital and new investment = $10,000 goodwill.
McC New Oak Total 4
$30,000
Old Capital $ 70,000 50,000 $120,000
Admission of Oak $60,000 $60,000
New Capital $ 70,000 50,000 60,000 $180,000
b Bonus to Oak = ($170,000/3) - $50,000 = $6,667 bonus
McC New Oak Total
Old Capital $ 70,000 50,000 ________ $120,000
Admission of Oak $(3,333) (3,334) 56,667 $50,000
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New Capital $ 66,667 46,666 56,667 $170,000
Chapter 16
16-19
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16-20
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-16 (continued) 5
a Capital balances Revalue assets Adjusted balances Excess payment to Car 20/50 Ending balances
Ben $100,000 20,000 120,000
Car $200,000 30,000 230,000
Das $200,000 50,000 250,000
(4,000) $116,000
14,000 $244,000
(10,000) $240,000
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Total $500,000 100,000 $600,000
Chapter 16
16-21
Solution E16-17 [Based on AICPA] 1
b
2
a
3
a Withdrawal Less: Additional investment Net withdrawal Less: Net decrease in capital Pla’s share of net income
$130,000 25,000 105,000 60,000 $ 45,000
Total net income ($45,000/.3 Pla’s interest)
$150,000
4
a Loss Interest Salaries Loss to divide Divided equally
5
$ (33,000) (22,000) (50,000) (105,000) 105,000 0
Fox
Gre
How
$ 12,000 30,000
$
$
(35,000) 7,000
$
6,000
(35,000) $(29,000)
b The bonus to Bec is $60,000, computed as follows: B B B 1.25B B
= = = = =
bonus .25($300,000 - B) $75,000 - .25B $75,000 $60,000
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4,000 20,000
(35,000) $(11,000)
16-22
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-18 1
2
c Old capital at fair value = $300,000 = 80% of new capital New capital ($300,000/.8) Less: Old capital Cash to be invested Old Capital $ 70,000 60,000 $130,000
Capital Changes $(7,000) (3,000) 60,000 $50,000
New Capital $ 63,000 57,000 60,000 $180,000
b Wil’s $40,000 capital investment > capital credit ($140,000 ´ 25%) Thus, goodwill to old partners. New capital ($40,000/.25) Old capital Goodwill Revaluation entry: Goodwill Eli capital ($20,000 ´ 60%) Geo capital ($20,000 ´ 30%) Dic capital ($20,000 ´ 10%) Admission Eli Geo Dic
4
$375,000 (300,000) $ 75,000
b Elt Don Kra
3
[Based on AICPA]
of Wil: capital ($92,000 ´ 25%) capital ($46,000 ´ 25%) capital ($22,000 ´ 25%) Wil capital
$160,000 140,000 $ 20,000 $20,000 $ 12,000 6,000 2,000 $23,000 11,500 5,500 $ 40,000
New capital balances: Eli capital ($92,000 - $23,000) Geo capital ($46,000 - $11,500) Dic capital ($22,000 - $5,500) Wil capital Total capital
$ 69,000 34,500 16,500 40,000 $160,000
b Purchase price paid by Sid Capital transferred to Sid ($444,000 ´ 20%) Combined gain to New and Sha
$132,000 88,800 $ 43,200
Because capital balances are not aligned with profit and loss sharing ratios, the $88,800 capital transferred to Sid will be charged to New and Sha by agreement. 5
d Old capital ($60,000 + $20,000) Copyright © 2015 Pearson Education Limited
$ 80,000
Chapter 16
16-23
Additional capital invested by Gra New capital Gra’s capital interest Gra’s capital account
15,000 95,000 20% $ 19,000
E16-18 (continued) 6
a Excess payment to Dix [$74,000 - ($210,000 - $160,000)]
$ 24,000
Implied goodwill ($24,000 excess payment/.2 profit and loss interest of Dixon) $120,000 7
b Per books Asset revaluationa Balance after revaluation Goodwill recognitionb Balance before retirement Retirement of Wil a b
20% 20% Wil Bro $ 70,000 $65,000 12,000 12,000 82,000 77,000 20,000 20,000 102,000 97,000 (102,000) 0 $97,000
60% Low $150,000 36,000 186,000 60,000 246,000 $246,000
Asset revaluation: $360,000 - $300,000 = $60,000 Goodwill: ($102,000 - $82,000)/.2 = $100,000
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Total $285,000 60,000 345,000 100,000 445,000 (102,000) $343,000
16-24
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-19 Kra, Lam, and Man Partnership Statement of Partners’ Capital for the year ended December 31, 2011 Kra
Lam
Man
Total
$65,000 4,000
$75,000
$70,000
(5,000)
(4,000)
$210,000 4,000 (9,000)
Net contributed capital Net income (see schedule)
69,000 11,500
70,000 23,500
66,000 12,000
205,000 47,000
Capital December 31, 2011
$80,500
$93,500
$78,000
$252,000
Capital January 1, 2011 Additional investment Withdrawals
Kra, Lam, and Man Partnership Schedule of Income Allocation for the year ended December 31, 2011 Net Income
Kra
Lam
Man
Income to divide Salary to Lam Interest allowances
$47,000 (11,000) (21,000)
$ 6,500
$11,000 7,500
$ 7,000
Remainder to divide Divided equally
15,000 (15,000)
5,000
5,000
5,000
$11,500
$23,500
$12,000
Income allocation
0
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Chapter 16
16-25
Solution E16-20 1
If assets are not revalued:
Gro Ham Iot
Before Admission of Iot
Transfers on Admission of Iot
Capital Balances After Admission
$ 45,000 65,000 $110,000
$(22,500) (32,500) 55,000 0
$ 22,500 32,500 55,000 $110,000
If assets are revalued:
Gro Ham Iot
Capital Balances Before Revaluation $ 45,000 65,000 $110,000
Revaluation ($30,000)
Capital Balances After Revaluation
Transfers to Iot
Capital Balances After Admission
$13,500 16,500 $30,000
$ 58,500 81,500 $140,000
$(29,250) (40,750) 70,000 0
$ 29,250 40,750 70,000 $140,000
2
Since old partners transferred 50% of their interests in future profits, profits should be divided: 22.5% to Gro, 27.5% to Ham, and 50% to Iot. The partners can, of course, agree to any profit and loss sharing arrangement that they choose.
3
In the absence of a new partnership agreement, profits will be divided equally.
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16-26
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution E16-21 Method 1: Bonus to retiring partner Cas capital Don capital Ear capital
$140,000 9,000 12,000
Cash $161,000 To record Cas’s retirement with a $21,000 bonus, shared by Don and Ear in their relative profit and loss sharing ratios (3/7 and 4/7, respectively). Method 2: Goodwill to retiring partner only Cas capital Goodwill
$140,000 21,000
Cash $161,000 To record Cas’s retirement and to record the $21,000 excess payment to Cas as goodwill. Method 3: Goodwill implied by excess payment Goodwill
$ 70,000 Cas capital $ 21,000 Don capital 21,000 Ear capital 28,000 To record goodwill implied by the excess payment to Cas on her retirement. Goodwill is computed as the excess payment divided by Cas’s profit and loss sharing ratio ($21,000/30%).
Cas capital
$161,000
Cash To record retirement of Cas.
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$161,000
Chapter 16
16-27
SOLUTIONS TO PROBLEMS Solution P16-1 Preliminary computation Beginning capital ($69,000 + $85,500 + $245,500) Capital adjustments: Additional investment less withdrawals Ending capital Net income
$400,000 (4,000) 396,000 (481,000) $ 85,000
Ell, Far, and Gar Statement of Partnership Capital for the year ended December 31, 2011 Capital balance January 1 Add: Additional investment Deduct: Salary allowances Net contributed capital Income allocation (see schedule) Capital balance December 31
Ell $69,000
Far $85,500 (12,000) 73,500
Gar $245,500 20,000 265,500
Total $400,000 20,000 (24,000) 396,000
(12,000) 57,000 24,200 $81,200
24,200 $97,700
36,600 $302,100
85,000 $481,000
Total $85,000 (24,000) 61,000 (61,000) 0
Ell
Far
Gar
$12,000
$12,000
12,200 $24,200
12,200 $24,200
Income allocation schedule: Income to divide Salary allowances Remainder to divide Divided 20:20:60 Income allocation
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$ 36,600 $ 36,600
16-28
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution P16-2 1
Mor, Osc, and Tre Partnership Balance Sheet at January 2, 2011 Cash ($20,000 + $95,000) Accounts receivable — net Inventories Plant assets — net ($120,000 + $120,000) Goodwill Total assets
$115,000 100,000 200,000 240,000 40,000a $695,000
Accounts payable Mor capital (1/3 interest) ($120,000 + $85,000b + $20,000) Osc capital (1/3 interest) ($100,000 + $85,000b + $20,000) Tre capital (1/3 interest) Total equities
$ 50,000
a b c
2
225,000 205,000 215,000c $695,000
Tre’s $215,000 ¸ 1/3 = $645,000 total capitalization $645,000 - $605,000 fv of old assets + Tre’s investment = $40,000 goodwill. $40,000 goodwill is divided equally between Mor and Osc Revaluation of assets to fair value ($170,000 divided equally between Mor and Osc) Tre’s investment ($95,000 cash + $120,000 building) = $215,000
Mor, Osc, and Tre Partnership Balance Sheet at January 2, 2011 Cash ($20,000 + $95,000) Accounts receivable — net Inventories Plant assets — net ($100,000 + $120,000) Total assets Accounts payable Mor capital (1/3 interest) ($120,000 + $35,000a) Osc capital (1/3 interest) ($100,000 + $35,000a) Tre capital (1/3 interest) Total equities a
$115,000 100,000 50,000 220,000 $485,000 $ 50,000 155,000 135,000 145,000b $485,000
Tre is paying a bonus to Mor and Osc because his investment of $215,000 ($95,000 cash and $120,000 building) is worth more than a 1/3 interest in the book value of the combined assets ($215,000 + $220,000). The $70,000 bonus is evenly divided between Mor and Osc based on their profit sharing ratios. The journal entry to record Tre’s admission in the partnership is: Cash 95,000 Building 120,000 Tre Capital 145,000 Mor Capital 35,000 Osc Capital 35,000
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Chapter 16 b
16-29
Tre’s investment ($95,000 cash + $120,000 building) = $215,000 Book value plus Tre’s investment is $220,000 + $215,000 = $435,000 Tre gets a 1/3 interest or $145,000.
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16-30
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution P16-3 Ash and Bar Partnership Income Distribution Schedule for 2011 Net income to divide Interest allowance Remainder to divide Salary to Ash Remainder to divide Bonus to Ash B = .2($84,000 - B) 1.2B = $16,800 B = $14,000 Remainder to divide Divided equally Income distribution
$105,000 (9,000) 96,000 (12,000) 84,000
(14,000) 70,000 (70,000) 0
Ash
Bar
$ 4,000
$ 5,000
Total $
9,000
12,000
12,000
14,000
14,000
35,000 $65,000
35,000 $40,000
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70,000 $105,000
Chapter 16
16-31
Solution P16-4 1
Profit allocation schedule Ale Net loss for 2011 Salary to Ale Loss to divide Interest allowances: Ale $60,000 ´ 10% Car $100,000 ´ 10% Eri $110,000 ´ 10% Loss to divide Divided 30:30:40 Allocation of loss
2
(6,000) (10,000) (11,000) (49,000) 49,000 0
Car
Eri
$ 10,000 6,000 $ 10,000 $ 11,000 (14,700) 1,300
$
(14,700) $ (4,700)
(19,600) $ (8,600)
Ale, Car, and Eri Partnership Statement of Partnership Capital for the year ended December 31, 2011 Capital January 1, 2011 Add: Additional Investments Deduct: Withdrawals Deduct: Drawings Net contributed capital Net loss for 2011 Capital December 31, 2011
3
$(12,000) (10,000) (22,000)
Ale $ 60,000
Car $ 90,000
Eri $110,000
60,000
30,000 120,000 120,000 (4,700)
20,000 130,000 (10,000) 120,000 (8,600)
$115,300
$111,400
(8,000) 52,000 1,300 $ 53,300
Total $260,000 50,000 310,000 (10,000) (8,000) 292,000 (12,000) $280,000
Correcting entry: Eri capital
$1,200 Ale capital $1,100 Car capital 100 To correct capital accounts for error in loss allocation: Correct loss allocation Less: Actual loss allocation Adjustment
Ale $ 1,300 (200) $ 1,100
Car $(4,700) 4,800 $ 100
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Eri $(8,600) 7,400 $(1,200)
16-32
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution P16-5 1.
Bonus calculation: B = 0.2 ($600,000 - $200,000 – B) B = $120,000 - $40,000 - 0.2B B = $80,000 – 0.2B 1.2 B = $80,000 B = $66,667
Net income Bonus to Karim Remainder to divide Salary allowances to Ahmed and Kamal Remainder to divide Divided base on ratio Remainder to divide Net income allocation
2
INCOME ALLOCATION SCHEDULE Kamal Ahmed 20% 30% $ 600,000 -$ 66,667
Karim 50% $ 66,667
Total $ 66,667
$ 533,333
-$ 200,000
$ 100,000
$100,000
$200,000
$ 66,667
$100,000
$ 166,667
$333,333
$ 166,667
$200,000
$ 233,334
$600,000
$ 333,333 -$ 333,333 $ 0
No bonus are distributed because no the partnership reported loss.
Net income Salary allowances to Ahmed and Kamal Remainder to divide Divided base on ratio Remainder to divide Net income allocation
INCOME ALLOCATION SCHEDULE Kamal Ahmed 20% 30% -$ 10,000
-$200,000
Karim 50%
$ 100,000
$100,000
-$ 42,000
-$63,000
-$105,000
$ 58,000
$ 37,000
-$105,000
Total
$200,000
-$210,000 $ 210,000
-$210,000
$ 0
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-$ 10,000
Chapter 16
16-33
Solution P16-6 1
Computation of reported capital balances: Jon Kel Capital January 2, 2011 $30,000 $30,000 Add: Investments for 2011 Less: Withdrawals for 2011 (5,000) (4,000) Net contributed capital 25,000 26,000 4,000 Income allocation — Schedule A 11,000 Capital December 31, 2011 36,000 30,000 Add: Investments for 2012 5,000 Less: Withdrawals for 2012 (3,000) Net contributed capital 41,000 27,000 4,500 Income allocation — Schedule B 12,100 Capital December 31, 2012 53,100 31,500 Add: Investments for 2013 Less: Withdrawals for 2013 (4,000) Net contributed capital 53,100 27,500 15,610 6,450 Income allocation — Schedule C Capital January 1, 2014 $68,710 $33,950 Schedule A Income to allocate Interest allowances: Jon ($30,000 ´ 10%) Kel ($30,000 ´ 10%) Gla ($30,000 ´ 10%) Remainder to divide Salary to Jon Remainder to divide Divided equally Income allocation
Net Income $19,000
Schedule B Income to allocate Interest allowances: Jon ($36,000 ´ 10%) Kel ($30,000 ´ 10%) Gla ($39,000 ´ 10%) Remainder to divide Salary to Jon Remainder to divide Divided equally Income allocation
Net Income $22,000
Schedule C Income to allocate Interest allowances: Jon ($53,100 ´ 10%) Kel ($31,500 ´ 10%) Gla ($36,400 ´ 10%) Remainder to divide
Net Income $29,000
(3,000) (3,000) (3,000) 10,000 (7,000) 3,000 (3,000) 0
(3,600) (3,000) (3,900) 11,500 (7,000) 4,500 (4,500) 0
(5,310) (3,150) (3,640) 16,900
Jon
Gla $30,000 5,000 35,000 4,000 39,000 (8,000) 31,000 5,400 36,400 6,000 (2,000) 40,400 6,940 $47,340
Total $ 90,000 5,000 (9,000) 86,000 19,000 105,000 5,000 (11,000) 99,000 22,000 121,000 6,000 (6,000) 121,000 29,000 $150,000
Kel
Gla
$ 3,000 $ 3,000 $
3,000
1,000 4,000
7,000 1,000 $11,000
1,000 $ 4,000
$
Jon
Kel
Gla
$ 3,600 $ 3,000 $
3,900
1,500 5,400
7,000 1,500 $12,100
1,500 $ 4,500
$
Jon
Kel
Gla
$ 5,310 $ 3,150
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$
3,640
16-34
Partnerships—Formation, Operations and Changes in Ownership Interests
Salary to Jon Remainder to divide Divided equally Income allocation
(7,000) 9,900 (9,900) 0
7,000 3,300 $15,610
3,300 $ 6,450
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$
3,300 6,940
Chapter 16
16-35
Solution P16-6 (continued) 2
Correct income and capital account balances: Reported income Understatement of depreciation Understatement of inventory at December 31, 2013 Corrected income Capital per books Understatement Capital as corrected
3
Jon $68,710 666 $69,376
2011 $19,000 (2,000)
2012 $22,000 (2,000)
2013 $29,000 (2,000)
$17,000
$20,000
8,000 $35,000
Kel $33,950 667 $34,617
Gla $47,340 667 $48,007
Total $150,000 2,000 $152,000
Correcting entry on January 1, 2014: Inventory
$ 8,000
Jon capital $ 666 Kel capital 667 Gla capital 667 Accumulated depreciation 6,000 To correct prior years’ profits and adjust inventory and accumulated depreciation. Note: Since residual income is divided equally, it is not necessary to recompute the income allocation and capital balances for each of the three years.
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16-36
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution P16-7
1. Assuming goodwill approach is used: 1. Partnership fair value ($1,800,000 / 40%) Total equity of the partnership Goodwill
$4,500,000 $3,250,000 $1,250,000
Journal entry: Goodwill (+A) 1,250,000 Kiyoshi capital (+OE) ($1,250,000 x 70%) Masao capital (+OE) ($1,250,000 x 30%) To record revaluation of partnership value Capital balances after revaluation Kiyoshi ($1,750,000 + $875,000) Masao ($1,500,000 + $375,000)
875,000 375,000
$2,625,000 $1,875,000
Journal entry: Kiyoshi capital (-OE) ($2,625,000 x 40%) 1,050,000 Masao capital (-OE) ($1,875,000 x 40%) 750,000 Naoki capital (+OE) 1,800,000 To transfer Kiyoshi capital and Masao Capital to Naoki capital 2.
Schedule to allocate the capital balance
CAPITAL BALANCES Before Revaluation
Revaluation
After Revaluation
Kiyoshi
$ 1,750,000
$ 875,000
$ 2,625,000
Capital Transferred -$ 1,050,000
Masao
$ 1,500,000
$ 375,000
$ 1,875,000
-$ 750,000
Naoki
$ 1,800,000 $ 3,250,000
$ 1,250,000
$ 4,500,000
Assuming bonus approach is used 1. Journal entry: Kiyoshi capital (-OE) ($1,750,000 x 40%) Masao capital (-OE) ($1,500,000 x 40%) Naoki capital (+OE)
$ 0
Capital After Transfer $ 1,575,000 35% $ 1,125,000 25% $ 1,800,000 40% $ 4,500,000
700,000 600,000 1,500,000
To transfer Kiyoshi capital and Masao Capital to Naoki capital 2. Schedule to allocate the capital balance CAPITAL BALANCES
Kiyoshi
Capital Capital After Per Books Transferred Transfer $ 1,750,000 -$ 700,000 $ 32% Copyright © 2015 Pearson Education Limited
Chapter 16
16-37
Masao
$ 1,500,000
Naoki
-$ 600,000 $ 1,300,000
$ 3,250,000
$ 0
1,050,000 $ 900,000 $ 1,300,000 $ 3,250,000
28% 40%
Solution P16-8 1
Car sells one-half of her interest to Dar for $90,000: Capital account balances:
Ann Bob Car Dar
capital capital capital capital Total capital
$ 75,000 100,000 62,500 62,500 $300,000
There is no basis for revaluation because the capital balances are not aligned with profit and loss sharing ratios. The entry to admit Dar transfers one-half of Car’s capital account to Dar, regardless of the amount Dar pays Car: Car capital
$62,500 Dar capital
$ 62,500
To admit Dar to a 25% interest in the partnership. 2
Dar invests $75,000 in the partnership for a 25% interest, and partnership assets are revalued: Capital account balances:
Ann Bob Car Dar
capital capital capital capital Total capital
$ 75,000 100,000 125,000 100,000 $400,000
Since Dar’s investment of $75,000 is less than his capital credit under the bonus procedure [($300,000 + $75,000) ´ 25%] and the assets are to be revalued, goodwill accrues to the new partner. The entry to record the admission of Dar to the partnership is: Cash Goodwill
$75,000 25,000 Dar capital
$100,000
To admit Dar to a 25% interest in the partnership and record goodwill computed as follows: Old capital $300,000/.75 interest retained by the old partners = $400,000 new capital. $400,000 new capital - ($300,000 old capital + $75,000 new investment) = $25,000 goodwill to new partner.
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16-38
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution P16-8 (continued) 3
Dar invests $80,000 for a 20% interest in the partnership and partnership assets are revalued: Capital account balances:
Ann Bob Car Dar
capital capital capital capital Total capital
$ 80,000 105,000 135,000 80,000 $400,000
Since Dar’s investment of $80,000 is greater than his capital credit under the bonus procedure [($300,000 + $80,000) ´ 20%], and assets are to be revalued, goodwill accrues to the old partners. The entries are as follows: Goodwill
$20,000 Ann capital $ 5,000 Bob capital 5,000 Car capital 10,000 To record goodwill and adjust the partners’ capital accounts: Dar’s investment $80,000/20% = $400,000 new capital $400,000 - $380,000 old capital plus new investment = $20,000 goodwill to the old partners.
Cash
4
$80,000 Dar capital $ 80,000 To admit Dar to a 20% interest in the partnership for $80,000.
Dar invests $90,000 for a 30% interest in the partnership and assets are not revalued: Capital account balances:
Ann Bob Car Dar
capital capital capital capital Total capital
$ 68,250 93,250 111,500 117,000 $390,000
Since Dar’s investment of $90,000 for a 30% interest is less than his capital credit [($300,000 + $90,000) ´ 30%], and no goodwill is to be recorded, Dar receives the bonus. The entry is as follows: Cash Ann capital Bob capital Car capital
$90,000 6,750 6,750 13,500
Dar capital $117,000 To record Dar’s $90,000 investment for a 30% interest and allow him a bonus of $27,000 computed as follows: ($390,000 total capital ´ 30%) - $90,000 investment = $27,000
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Chapter 16
16-39
Solution P16-9 1
Revaluation (goodwill to new partner) Cash Goodwill
$85,080 4,920
Con capital $90,000 To record admission of Con and goodwill to Con computed as: Old capital of $450,000 = 5/6 new capital New capital = $540,000 Con’s capital = $540,000 ´ 1/6 = $90,000 Goodwill to Con = $90,000 - $85,080 = $4,920 No revaluation (bonus to new partner) Cash Pat capital Mic capital Hay capital
$85,080 1,640 2,050 410
Con capital $89,180 To record admission of Con and bonus to Con computed as: New capital = $450,000 + $85,080 = $535,080 Con capital = $535,080 ´ 1/6 interest = $89,180 Bonus = $89,180 - $85,080 = $4,100, allocated 40:50:10 2
Revaluation Goodwill
$60,480 Pat capital (40%) $24,192 Mic capital (50%) 30,240 Hay capital (10%) 6,048 To record revaluation of old partnership computed as: New capital = $85,080 ¸ 1/6 = $510,480 $510,480 - $450,000 = $60,480 undervaluation
Pat capital Mic capital Hay capital
$28,032 41,040 16,008
Con capital $85,080 To record capital transfers equal to 1/6 of old partners’ capital balances as adjusted: Pat ($144,000 + $24,192)/6 = $28,032 Mic ($216,000 + $30,240)/6 = $41,040 Hay ($90,000 + $6,048)/6 = $16,008 No revaluation Pat capital Mic capital Hay capital
$24,000 36,000 15,000
Con capital To transfer 1/6 of capital balances to Con.
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$75,000
16-40
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution P16-10 1
Car pays $450,000 directly to Aid and Tha for 40% of each of their interests and the bonus procedure is used. Aid capital Tha capital
$200,000 112,000
Car capital Existing capital $780,000 ´ 40% = $312,000. 2
$312,000
Car pays $600,000 directly to Aid and Tha for 40% of each of their interests and goodwill is recorded. Goodwill
$720,000 Aid capital $360,000 Tha capital 360,000 Goodwill = Payment to old partners $600,000/.4 - $780,000 existing capital = $720,000
Aid capital Tha capital
$344,000 256,000
Car capital Aid capital = ($500,000 + $360,000) ´ .4 Tha capital = ($280,000 + $360,000) ´ .4 3
$600,000
Car invests $450,000 in the partnership for her 40% interest, and goodwill is recorded. Cash Goodwill
$450,000 70,000
Car capital $520,000 Old capital $780,000/.6 = $1,300,000 new capital New capital $1,300,000 - old capital $780,000 + new investment $450,000 = goodwill $70,000 4
Car invests $600,000 in the partnership for her 40% interest, and goodwill is recorded. Goodwill
$120,000 Aid capital $ 60,000 Tha capital 60,000 Goodwill = new investment $600,000/.4 = $1,500,000 total capital $1,500,000 - $1,380,000 old capital and new investment = $120,000
Cash
$600,000 Car capital To record new partner’s investment.
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$600,000
Chapter 16
16-41
Solution P16-11 Har, Ion, and Jer Partnership Statement of Partnership Capital for the years ended December 31, 2011 and 2012 Jer Capital $20,000
(4,000)
Ion Capital $20,000 8,000
Total Capital $ 60,000 8,000 (4,000)
Net contributed capital Net income — 2011
16,000 4,000
28,000 4,000
20,000 16,000
64,000 24,000
Capital December 31, 2011 Withdrawal — 2012
20,000 (4,000)
32,000 (8,000)
36,000
88,000 (12,000)
Investment January 1, 2011 Additional investment — 2011 Withdrawal — 2011
Net contributed capital Net income — 2012 Capital December 31, 2012
Har Capital $20,000
16,000 2,727 $18,727
24,000 4,364 $28,364
36,000 16,909 $52,909
76,000 24,000 $100,000
Computation of net income: Assets $129,500 - liabilities $29,500 = $100,000 capital December 31, 2012 Beginning capital $60,000 + investment $8,000 - withdrawals $16,000 = $52,000 $100,000 - $52,000 = $48,000 net income for the two year period. Schedule of Profit and Loss Distribution Income for 2011 Salary allowance to Jer Remainder to divide One-third to each partner Allocation of income Income for 2012 Salary allowance to Jer Remainder to divide Divided in beginning capital ratios: 20/88, 32/88, 36/88 Allocation of income
Net Income $24,000 (12,000) 12,000 (12,000) 0
Har
Ion
$ 12,000 $ 4,000
$ 4,000
4,000
$ 4,000
$ 4,000
$ 16,000
$24,000 (12,000) 12,000 (12,000) 0
Jer
$ 12,000 $ 2,727
$ 4,364
4,909
$ 2,727
$ 4,364
$ 16,909
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16-42
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution P16-12 1
Closing entries for Par and Boo Partnership Service revenue $50,000 Supplies expense $17,000 Utilities expense 4,000 Other miscellaneous expenses 5,000 Income summary 24,000 To close revenue and expense to profit and loss summary account. Par capital Boo capital
$ 8,000 10,000
Salaries to partners $18,000 To close salaries to partners (drawings) to partners’ capital accounts. Income summary $24,000 Par capital $12,000 Boo capital 12,000 To close income summary and to divide profits equally as required in the absence of a profit sharing agreement. 2
Par and Boo Partnership Statement of Partners’ Capital for the ten months ending December 31, 2011 Investments March 1, 2011 Add additional investments: Boo July 1 Par October 1 Less Par withdrawal May 2 Less monthly drawings (salaries) Net contributed capital Add: Partnership net income Partnership capital December 31, 2011
Par $30,000 4,000 34,000 (4,000) (8,000) 22,000 10,625 $32,625
Boo $30,000
Total $60,000
10,000 40,000 (10,000) 30,000 13,375
10,000 4,000 74,000 (4,000) (18,000) 52,000 24,000
$43,375
$76,000
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Chapter 16
Solution P16-12
16-43
(continued) Schedule of Profit and Loss Distribution
Net income Salary allowances Remainder to divide Divide in average capital ratios: Par 28/64 (or 43.75%) Boo 36/64 (or 56.25%) Distribution of income
Net Income $24,000 (18,000) 6,000 (2,625) (3,375) 0
Par
Boo
$ 8,000
$ 10,000
2,625 $10,625
3,375 $ 13,375
Computation of Average Capital Balances Average capital $30,000 ´ 2 months = $26,000 ´ 5 months = $30,000 ´ 3 months = Total Average capital ($280,000/10 months) 3
of Par $ 60,000 130,000 90,000 $280,000 $ 28,000
Average capital $30,000 ´ 4 months = $40,000 ´ 6 months = Total Average capital ($360,000/10 months)
of Boo $120,000 240,000 $360,000
$ 36,000
Par and Boo Partnership Schedule of Profit and Loss Distribution for the ten months ending December 31, 2011 Net income Salary allowances Remainder to divide Interest allowance: Par $28,000 ´ 12% ´ 10/12 year Boo $36,000 ´ 12% ´ 10/12 year
Net Income $24,000 (18,000) 6,000 (2,800)
Par
Boo
$ 8,000
$ 10,000
2,800
(3,600) 3,600
Loss to divide Divide loss 50:50 Distribution of income
(400) 400 0
(200) $10,600
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(200) $ 13,400
16-44
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution P16-13 1
No revaluation of partnership assets Proposal 1. Tom purchases one-half of Pet’s capital from Pet Pet capital $37,500 Tom capital $37,500 To record Tom’s admission to the partnership for a one-fourth interest in capital and profits by direct purchase of one-half of Pet’s 50% interest. Tom’s capital credit is equal to capital transferred from Pet to Tom ($75,000 ´ 50%). Proposal 2. Tom purchases one-fourth of each partners’ capital from partners Pet capital $18,750 Qua capital 12,500 She capital 6,250 Tom capital $37,500 To record Tom’s admission to the partnership by direct purchase of one-fourth of each partner’s capital and future profits. Tom’s capital credit is equal to the capital transferred from the other partners: ($75,000 ´ 25%) + ($50,000 ´ 25%) + ($25,000 ´ 25%). Proposal 3. Tom invests cash in the partnership for a one-fourth interest Cash $55,000 Pet capital $ 1,875 Qua capital 1,125 She capital 750 Tom capital 51,250 To record Tom’s $55,000 investment for a one-fourth interest in capital and future profits. Total capital is $150,000 + $55,000. Tom’s share of total capital is $205,000 ´ 25%, or $51,250. Tom’s investment of $55,000 less Tom’s capital credit of $51,250 equals $3,750 bonus to old partners.
2
Partnership assets are revalued Proposal 1. Tom purchases one-half of Pet’s capital from Pet Goodwill $90,000 Pet capital $45,000 Qua capital 27,000 She capital 18,000 To record goodwill on basis of the price paid by Tom for a onefourth interest in capital and profits. Total capital is $240,000 ($60,000/25%). Total capital of $240,000 less recorded capital of $150,000 equals $90,000 goodwill. Pet capital
$60,000 Tom capital $60,000 To record Tom’s purchase of one-half of Pet’s capital and right to Pet’s profits.
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Chapter 16
16-45
Solution P16-13
(continued)
Proposal 2. Tom purchases one-fourth of partners’ capital from partners Goodwill $30,000 Pet capital $15,000 Qua capital 9,000 She capital 6,000 To record goodwill on the basis of the price paid by Tom for onefourth of the capital and profits of each of the partners. Total capital is $180,000 ($45,000/25%). Total capital of $180,000 less recorded capital of $150,000 equals $30,000 goodwill. Pet capital Qua capital She capital
$22,500 14,750 7,750
Tom capital $45,000 To record Tom’s admission to a one-fourth interest in partnership capital and profits. Tom’s capital is equal to the capital transferred after revaluation: ($90,000 ´ 25%) + ($59,000 ´ 25%) + ($31,000 ´ 25%). Proposal 3. Tom invests cash in the partnership for one-fourth interest Goodwill $15,000 Pet capital $ 7,500 Qua capital 4,500 She capital 3,000 To record goodwill based on Tom’s investment of $55,000 for a onefourth interest in partnership capital and profit. Total capital of $220,000 - ($150,000 recorded capital + $55,000 investment) = $15,000 goodwill. Cash
$55,000 Tom capital $55,000 To record Tom’s $55,000 investment for a one-fourth interest in capital and profits. Total capital = $220,000; Tom’s capital is $220,000 ´ 25%, or $55,000.
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16-46
Partnerships—Formation, Operations and Changes in Ownership Interests
Solution P16-14 1
Average capital balances Tim $60,000 ´ 3 months = 70,000 ´ 5 months = 64,000 ´ 4 months = $786,000/12 months =
$180,000 350,000 256,000 $786,000 $ 65,500
2 Beginning balances Add: Investments Less: Withdrawals Less: Drawings Net contributed capital Add: Net income (see schedule) Ending capital balances
Las $75,000 ´ 4 months = 63,000 ´ 6 months = 57,000 ´ 2 months = $792,000/12 months =
$300,000 378,000 114,000 $792,000 $ 66,000
Tim $ 60,000 10,000 (6,000) (18,000) 46,000 54,600 $100,600
Las $75,000 0 (18,000) (24,000) 33,000 48,400 $81,400
Total $135,000 10,000 (24,000) (42,000) 79,000 103,000 $182,000
Tim
Las
$18,000
$ 24,000
36,600 $54,600
24,400 $ 48,400
Schedule of income allocation: Net income to allocate ($182,000 $79,000 Salary allowances Remainder to divide Divided 60 : 40 Income allocation
$103,000 (42,000) 61,000 (61,000) 0
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