PARTNERSHIP

SOME ILLUSTRATIONS ON PARTNERSHIP:

Partnerships

A. Partnership--a partnership is an association of two more persons to carry

on as co-owners of a business for profit

B. Characteristics of a Partnership
1. Mutual Agency--the action of any partner is binding on all other
partners when the partner is engaging in partnership business
2. Limited Life--the partnership is dissolved whenever a new partner is
admitted to the partnership or an old partner withdraws from the
partnership
3. Unlimited Liability--each partner is personally liable for the
liabilities of the partnership if the partnership assets are
insufficient to settle the liabilities of the partnership
4. Co-ownership of Property--partnership assets are owned jointly by all
the partners
a. Separate Capital Accounts--separate capital and drawing accounts
are maintained for each partner to keep track of each partner’s
claim against the partnership’s assets
5. Taxation--the net income of the partnership is not taxed at the
partnership level, but is allocated to the partners and is included as
income on their individual tax returns

C. Partnership Agreement--a partnership agreement is the written agreement

between the partners stipulating how the partnership is to be operated,
including the distribution of net income to the partners
1. Lack of Partnership Agreement--if there is no partnership agreement,
net income is allocated equally to all the partners

D. Formation
1. Accounting Treatment--the assets and liabilities contributed to the
partnership should be recorded at their fair market value at the date
of formation of the partnership, and the partners' capital accounts are
credited for the recorded value of the net assets contributed by each
partner
2. Illustration--A, B, and C formed a partnership; A contributed inventory
with a fair market value of $100,000; B contributed equipment with a
fair market value of $180,000 and a building with a fair market value
of $600,000 and subject to a $480,000 mortgage; C contributed $100,000
in cash

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PARTNERSHIP

Cash 100,000
Inventory 100,000
Equipment 180,000
Building 600,000
Mortgage Payable 480,000
A, Capital 100,000
B, Capital 300,000
(180,000 + 600,000 – 480,000)
C, Capital 100,000

B. Division of Profits--the objective of the partnership's profit-and-loss

sharing arrangement is to allocate the profit and loss of the partnership
among the partners in a way that reflects each partner's contribution to
the success of the firm
1. Allocation Methods--bases for the allocation of the profit and loss of
the partnership usually take one or a combination of the following
forms:
a. Fixed Ratios--profit and loss is allocated to the partners by
providing a fixed percentage of profit and loss to the individual
partners
b. Service Contributions--salary allowances are provided to the
partners to reward the individual partners for their different
service contributions to the operation of the partnership
c. Capital Investments--capital allowances, usually in the form of
interest on the capital balances of the individual partners, are
provided to the partners to reward the individual partners for
their different capital investments
2. Illustrations
a. A, B, and C are partners with profit-and-loss sharing ratios of
30%, 25%, and 45%, respectively, and capital balances of $50,000,
$100,000, and $350,000, respectively; the partnership agreement
provided for salaries of $20,000 for A, $25,000 for B, and $15,000
for C and 10% interest on the partners' capital balances; net
income was $140,000
_ A B C Total_
Salaries 20,000 25,000 15,000 60,000
Interest 5,000 10,000 35,000 50,000
Fixed Ratio _ 9,000 7,500 13,500 30,000
_34,000 42,500 63,500 140,000

Interest:
A = 10% x 50,000 = 5,000
B = 10% x 100,000 = 10,000
C = 10% x 350,000 = 35,000

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PARTNERSHIP

Fixed Ratio:
A = 30% x (140,000 – (60,000 + 50,000)) = 9,000
B = 25% x 30,000 = 7,500
C = 45% x 30,000 = 13,500

b. A, B, and C are partners with profit-and-loss sharing ratios of

30%, 25%, and 45%, respectively, and capital balances of $50,000,
$100,000, and $350,000, respectively; the partnership agreement
provided for salaries of $20,000 for A, $25,000 for B, and $15,000
for C and 10% interest on the partners' capital balances; net
income was $100,000
_ A B C Total_
Salaries 20,000 25,000 15,000 60,000
Interest 5,000 10,000 35,000 50,000
Fixed Ratio ( 3,000) ( 2,500) ( 4,500) ( 10,000)
_22,000 32,500 45,500 100,000

Interest:
A = 10% x 50,000 = 5,000
B = 10% x 100,000 = 10,000
C = 10% x 350,000 = 35,000

Fixed Ratio:
A = 30% x (100,000 – (60,000 + 50,000)) = (3,000)
B = 25% x (10,000) = (2,500)
C = 45% x (10,000) = (4,500)

C. Changes in Ownership--since a change in ownership creates a new

partnership, the assets and liabilities of the old partnership should be
revalued to reflect fair market value at the date of change in ownership
1. Investment in the Partnership--the new partner gains admission to the
partnership by investing assets directly into the partnership
a. Accounting Treatment--the assets and liabilities invested in the
partnership should be recorded at their fair market value at the
date of investment in the partnership, and the new partner's
capital account is credited for his capital interest multiplied by
the recorded value of the net assets of the partnership after the
investment of the new partner with the difference, if any, between
the recorded value of the net assets invested by the new partner
and the amount recorded in his capital account (bonus payment)
allocated to the old partners on the basis of their profit-and-loss
sharing ratios before the investment of the new partner
b. Illustrations
1) A and B are partners with profit-and-loss sharing ratios of
25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C invested $50,000 in cash for a
20% capital interest in the partnership

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PARTNERSHIP

C = 20% x (130,000 + 70,000 + C)

C = 50,000

Cash 50,000
C, Capital 50,000
(50% x (200,000 + 50,000))

2) A and B are partners with profit-and-loss sharing ratios of

25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C invested $60,000 in cash for a
20% capital interest in the partnership; C agreed that the
partnership had goodwill of $40,000
C = 20% x (130,000 + 70,000 + 40,000 + C)
C = 60,000

Cash 60,000
C, Capital 52,000
(20% x (200,000 + 60,000))
A, Capital 2,000
(25% x (60,000 - 52,000))
B, Capital 6,000
(75% x 8,000)

3) A and B are partners with profit-and-loss sharing ratios of

25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C invested $30,000 in cash for a
20% capital interest in the partnership; A and B agreed that C
had goodwill of $20,000
C + 20,000 = 20% x (200,000 + C + 20,000)
C = 30,000

Cash 30,000
A, Capital 4,000
(25% x (30,000 – 46,000))
B, Capital 12,000
(75% x (16,000))
C, Capital 46,000
(20% x (200,000 + 30,000))

2. Purchase of an Interest--the new partner gains admission to the

partnership by transferring assets directly to one or more of the old
partners
a. Accounting Treatment--the new partner's capital account is credited
for his capital interest multiplied by the recorded value of the
net assets of the partnership, and the old partners' capital
accounts are debited for the new partner’s capital interest
multiplied by the old partners’ capital account balance

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PARTNERSHIP

b. Illustrations
1) A and B are partners with profit-and-loss sharing ratios of
25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C purchased a 20% capital interest
in the partnership by purchasing 20% of A’s capital balance for
for $26,000 and 20% of B’s capital interest for $14,000
C = 20% x 200,000
C = 40,000

A, Capital 26,000
(20% x 130,000)
B, Capital 14,000
(20% x 70,000)
C, Capital 40,000
(20% x 200,000)

2) A and B are partners with profit-and-loss sharing ratios of

25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C purchased a 20% capital interest
in the partnership by purchasing 20% of A’s capital balance for
for $28,000 and 20% of B’s capital interest for $20,000; C
agreed that the partnership had goodwill of $40,000
C = 20% x (200,000 + 40,000)
C = 48,000

A, Capital 26,000
(20% x 130,000)
B, Capital 14,000
(20% x 70,000)
C, Capital 40,000
(20% x 200,000)

3) A and B are partners with profit-and-loss sharing ratios of

25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C purchased a 20% capital interest
in the partnership by purchasing 20% of A’s capital balance for
for $23,500 and 20% of B’s capital interest for $6,500; A and
B agreed that C had goodwill of $12,500
C + 12,500 = 20% x (200,000 + 12,500)
C = 30,000

A, Capital 26,000
(20% x 130,000)
B, Capital 14,000
(20% x 70,000)
C, Capital 40,000
(20% x 200,000)

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PARTNERSHIP

3. Withdrawl of a Partner--the old partner leaves the partnership by

withdrawing assets from the partnership to liquidate his capital
interest
a. Accounting Treatment--the retiring partner's capital account is
zeroed out with the difference, if any, between the assets
withdrawn by the retiring partner and his capital balance (bonus
payment) allocated to the remaining partners on the basis of their
relative profit-and-loss sharing ratios before the withdrawl of the
retiring partner
b. Illustrations
1) A, B, and C are partners with profit-and-loss sharing ratios
of 20%, 60%, and 20%, respectively, and capital balances of
$135,000, $70,000, and $55,000, respectively; C withdrew
$55,000 in cash from the partnership to liquidate his capital
interest in the partnership
C, Capital 55,000
Cash 55,000

2) A, B, and C are partners with profit-and-loss sharing ratios

of 20%, 60%, and 20%, respectively, and capital balances of
$135,000, $70,000, and $55,000, respectively; C withdrew
$65,000 in cash from the partnership to liquidate his capital
interest in the partnership; A, B, and C agreed that the
partnership had goodwill of $50,000
C = 55,000 + 20% x 50,000
C = 65,000

C, Capital 55,000
A, Capital 2,500
(20% / 80% x (55,000 - 65,000))
B, Capital 7,500
(60% / 80% x 10,000)
Cash 65,000

D. Liquidation--the sale of the partnership assets, payment of the

partnership's liabilities, and the distribution of any remaining assets to
the partners
1. Accounting Treatment
a. Realization of Assets--any gains or losses realized from the sale
of partnership assets are allocated to the partners using their
profit-and-loss sharing ratios
b. Distribution of Realization Proceeds--the claims against the assets
of the partnership are satisfied in the following order:
1) Creditors--amounts owed to partnership creditors are paid first
2) Partners--amounts owed to partners for their capital balances
to the extent of credit balances in their capital accounts

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PARTNERSHIP

a) Capital Deficiency--a debit balance in a partner's capital

account represents a claim of the partnership against that
partner
1) Cash Contribution--if a partner with a debit balance in
his capital account contributes cash to the partnership
to make up his capital deficiency, the debit balance in
his capital account is reduced for the amount of cash
contributed
2) No Contribution--if a partner with a debit balance in
his capital account does not contribute cash to the
partnership to make up his capital deficiency or
contributes insufficient cash to the partnership to
make up his capital deficiency, the debit balance in
his capital deficiency is allocated to the other
partners in their relative profit-and-loss sharing
ratios

2. Illustrations
a. A, B, and C are partners with profit-and-loss sharing ratios of
20%, 60%, and 20%, respectively; the partnership balance sheet
consisted of cash of $20,000, noncash assets of $270,000,
liabilities of $40,000, and capital balances of $140,000 for A,
$60,000 for B, and $50,000 for C; the partnership was liquidated by
selling the noncash assets for $310,000; the partners have
sufficient cash to make up any capital deficiencies
Noncash A B C
_ Cash_ _Assets Liab. Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
310,000 (270,000) _ _ 8,000 _24,000 _ 8,000
330,000 _ --- _ 40,000 148,000 84,000 58,000
( 40,000) (_40,000) _ _ _ _ _ _
290,000 _ --- _ 148,000 84,000 58,000
(290,000) (148,000) ( 84,000) ( 58,000)
_ --- _ _ --- _ _ --- _ _ --- _

Gain Allocation:
A = 20% x (310,000 – 270,000) = 8,000
B = 60% x 40,000 = 24,000
C = 20% x 40,000 = 8,000

b. A, B, and C are partners with profit-and-loss sharing ratios of

20%, 60%, and 20%, respectively; the partnership balance sheet
consisted of cash of $20,000, noncash assets of $270,000,
liabilities of $40,000, and capital balances of $140,000 for A,
$60,000 for B, and $50,000 for C; the partnership was liquidated by
selling the noncash assets for $220,000; the partners have
sufficient cash to make up any capital deficiencies

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PARTNERSHIP

Noncash A B C
_ Cash_ _Assets Liab. Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
220,000 (270,000) _ (_10,000) (_30,000) (_10,000)
240,000 _ --- _ 40,000 130,000 30,000 40,000
( 40,000) (_40,000) _ _ _ _ _ _
200,000 _ --- _ 130,000 30,000 40,000
(200,000) (130,000) ( 30,000) ( 40,000)
_ --- _ _ --- _ _ --- _ _ --- _

Loss Allocation:
A = 20% x (220,000 – 270,000) = (10,000)
B = 60% x (50,000) = (30,000)
C = 20% x (50,000) = (10,000)

c. A, B, and C are partners with profit-and-loss sharing ratios of

20%, 60%, and 20%, respectively; the partnership balance sheet
consisted of cash of $20,000, noncash assets of $270,000,
liabilities of $40,000, and capital balances of $140,000 for A,
$60,000 for B, and $50,000 for C; the partnership was liquidated by
selling the noncash assets for $160,000; the partners have
sufficient cash to make up any capital deficiencies
Noncash A B C
_ Cash_ _Assets Liab. Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
160,000 (270,000) _ (_22,000) (_66,000) (_22,000)
180,000 _ --- _ 40,000 118,000 ( 6,000) 28,000
( 40,000) (_40,000) _ _ _ _ _ _
140,000 _ --- _ 118,000 ( 6,000) 28,000
_ 6,000 _ 6,000
146,000 _ --- _
(146,000) (118,000) ( 28,000)
_ --- _ _ --- _ _ --- _

Loss Allocation:
A = 20% x (160,000 – 270,000) = (22,000)
B = 60% x (110,000) = (66,000)
C = 20% x (110,000) = (22,000)

d. A, B, and C are partners with profit-and-loss sharing ratios of

20%, 60%, and 20%, respectively; the partnership balance sheet
consisted of cash of $20,000, noncash assets of $270,000,
liabilities of $40,000, and capital balances of $140,000 for A,
$60,000 for B, and $50,000 for C; the partnership was liquidated by
selling the noncash assets for $160,000; the partners are
personally insolvent

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PARTNERSHIP

Noncash A B C
_ Cash_ _Assets Liab. Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
160,000 (270,000) _ (_22,000) (_66,000) (_22,000)
180,000 _ --- _ 40,000 118,000 ( 6,000) 28,000
( 40,000) (_40,000) _ _ _ _ _ _
140,000 _ --- _ 118,000 ( 6,000) 28,000
_ ( 3,000) _ 6,000 ( 3,000)
140,000 115,000 _ --- _ 25,000
(140,000) (115,000) ( 25,000)
_ --- _ _ --- _ _ --- _

Loss Allocation:
A = 20% x (160,000 – 270,000) = (22,000)
B = 60% x (110,000) = (66,000)
C = 20% x (110,000) = (22,000)

B’s Deficit Allocation:

A = 20% / (20% + 20%) x (6,000) = (3,000)
C = 20% / 40% x (6,000) = (3,000)

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PARTNERSHIP

ICMAP—FRESH
CLASSES—15TH
 ACCOUNTING OF ICMAP STAGE 1,2,3 JANUARY 2009
STAGE 1,2,3
 ACCOUNTING OF CA MODULE – B & D *PRINCIPLES OF
ACCOUNTING
*COST
 ACCOUNTING OF PIPFA ACCOUNTING
*FINANCIAL
 ACCOUNTING OF BBA,MBA AND O/A LEVEL ACCOUNTING
*COST
ACCOUNTING-
 ACCOUNTING AND STATISTICS OF I.COM APPRAISAL

 ACCOUNTING AND STATISTICS OF B.COM

 STATISTICS OF MA-ECONOMICS

BY PROFESSIONAL AND EXPERIENCED TEACHER

KHALID AZIZ HOME

TUITIONS
FOR
CONTACT GIRLS…
0322-3385752

R-1173, 3RD FLOOR, ALNOOR SOCIETY, BLOCK 19, F.B.AREA, NEAR POWER HOUSE,
KARACHI.

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