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Chapter 13Partnerships and Limited Liability CorporationsAccounting,21st EditionWarren Reeve FessPowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University Copyright 2004 South-Western,a division of Thomson Learning.All rights reserved.Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.Some of the action has been automated,Some of the action has been automated,so click the mouse when you see this so click the mouse when you see this lightning bolt in the lower right-hand lightning bolt in the lower right-hand corner of the screen.You can point and corner of the screen.You can point and click anywhere on the screen.click anywhere on the screen.1.Describe the basic characteristics of proprietorships,corporations,partnerships,and limited liability corporation.2.Describe and illustrate the equity reporting for proprietorships,corporations,partnerships,and limited liability corporations.3.Describe and illustrate the accounting for forming a partnership.ObjectivesAfter studying this chapter,you should be able to:4.Describe and illustrate the accounting for dividing the net income and net loss of a partnership.Objectives5.Describe and illustrate the accounting for the dissolution of a partnership.6.Describe and illustrate the accounting for liquidation of a partnership.7.Describe the lifecycle of a business,including the role of venture capitalists,initial public offerings,and underwriters.Alternative Forms of Business EntitiesAdvantagesEase in organizingLow cost of organizingDisadvantagesDifficulty in raising large amounts of capitalUnlimited liabilityJoes Review of Chapter 1A proprietorship is owned by one individual.Alternative Forms of Business EntitiesA corporation is organized under state or federal statutes as a separate legal entity.AdvantagesThe ability to obtain large amounts of resources by issuing stocksLimited liability for the ownersDisadvantagesDouble taxationMore complexity and regulationsJ&M,Inc.Alternative Forms of Business EntitiesJ&M,Inc.A business may organize as an S Corporation.The IRS allows income to pass through the S Corporation to the individual stockholder without the corporation having to pay tax on the income.Alternative Forms of Business EntitiesA partnership is an association of two or more individuals.AdvantagesMore financial resources than a proprietorshipAdditional management skillsJoe and Martys Alternative Forms of Business EntitiesDisadvantagesLimited lifeUnlimited liabilityCo-ownership of partnership propertyMutual agencyJoe and Martys A partnership is an association of two or more individuals.Alternative Forms of Business EntitiesAn important right of partners is to participate in the income of the partnership.Alternative Forms of Business EntitiesEach partner must report their share of partnership income on their personal tax returns.Alternative Forms of Business EntitiesA partnership is created by a contract,known as the partnership agreement or articles of partnership.Alternative Forms of Business EntitiesA variant of the regular partnership is a limited partnership.This form of partnership allows partners that are not involved in the operations of the partnership to retain limited liability.Limited Liability CorporationsnCombines the advantages of the corporate and partnership forms.nOwners are termed“members”rather than“partners.”nMembers must create an operating agreement.nLLC may elect to be treated as a partnership for tax purposes.ContinuedLimited Liability CorporationsnUnless specified in the operating agreement,LLCs have a limited life.nMembers may elect operating the LLC as a“member managed”entity.nLLC provides limited liability for the members.nLLCs must file“articles of organization”with state governmental authorities.Comparison of Alternate Entity CharacteristicsEase of FormationProprietorshipSimpleCorporationComplexPartnershipSimpleLLCModerateComparison of Alternate Entity CharacteristicsLegal LiabilityProprietorshipNo limitationCorporationLimited liabilityPartnershipNo limitationLLCLimited liabilityComparison of Alternate Entity CharacteristicsTaxationProprietorshipNontaxable entityCorporationTaxable entityPartnershipNontaxable entityLLCNontaxable entity by electionComparison of Alternate Entity CharacteristicsLimitation on Life of EntityProprietorshipYesCorporationNoPartnershipYesLLCYesComparison of Alternate Entity CharacteristicsEase of Raising CapitalProprietorshipDifficultCorporationEasierPartnershipModerateLLCModerateEquity Reporting for Alternative Entity FormsProprietorshipsnProprietorships use a capital account to record investments by the owner of the business.nWithdrawals by the owner are recorded in the owners drawing account.Equity Reporting for Alternative Entity FormsProprietorshipsGreene LandscapesStatement of Owners EquityFor the year ended December 31,2006Duncan Greene,capital,Dec.31,2005$345,000Net income$79,000Less withdrawals 35,000Increase in owners equity 44,000Duncan Greene,capital,Dec.31,2006$389,000Equity Reporting for Alternative Entity FormsCorporationsnInvestments by stockholders in the business use capital stock accounts,such as Common Stock and Preferred Stock.nDividends to owners(stockholders)are recorded by a debit to Retained Earnings.Equity Reporting for Alternative Entity FormsCorporationsEquity Reporting for Alternative Entity FormsPartnerships and Limited Liability CorporationsnInvestments and withdrawals for partnerships is similar to proprietorships,except there is a capital and drawing account for each partner.nLimited liability corporations are similar to a partnership except that each owner is referred to as“member.”Equity Reporting for Alternative Entity FormsPartnerships Forming a PartnershipJoseph Stevens and Earl Foster agree to combine their hardware businesses in a partnership.They agree that the partnership is to assume the liabilities of the separate businesses.Apr.1 Cash7 200 00Accounts Receivable16 300 00 Merchandise Inventory28 700 00 Store Equipment5 400 00Office Equipment1 500 00Allowance for Doubtful Accounts1 500 00Accounts Payable2 600 00Joseph Stevens,Capital55 000 00Stevens Transfer of Assets,Liability,and Equity Forming a PartnershipA similar entry would be made for the assets,liabilities,and equity of Earl Foster.Forming a PartnershipAssume that instead of forming a partnership,the two men formed a limited liability corporation.Apr.1 Cash7 200 00Accounts Receivable16 300 00Merchandise Inventory28 700 00Store Equipment5 400 00Office Equipment1 500 00Allowance for Doubtful Accounts1 500 00Accounts Payable2 600 00Joseph Stevens,Member Equity55 000 00Stevens Transfer of Assets,Liability,and Equity Dividing IncomeServices of PartnersThe partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to have an annual salary allowance of$30,000 and Mills is to receive$24,000.Any net income is to be divided equally.The firm had a net income of$75,000.J.Stone C.Mills TotalSalary allowance$30,000$24,000$54,000Remaining income10,50010,50021,000Division of net income$40,500$34,500$75,000 Dividing IncomeServices of PartnersDec.31 Income Summary75 000 00Jennifer Stone,Capital40 500 00Crystal Mills,Capital 34 500 00 Dividing IncomeLLC AlternativeDec.31 Income Summary75 000 00Jennifer Stone,Member Equity40 500 00Crystal Mills,Member Equity 34 500 00 Dividing IncomeServices of Partners and InvestmentsThe partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to have an annual salary allowance of$30,000 and Mills is to receive$24,000.Interest of 12%is provided on each partners capital balance on January 1.Any net income is to be divided equally.The firm had a net income of$75,000.Dividing IncomeServices of Partners and Investments J.Stone C.Mills TotalSalary allowance$30,000$24,000$54,000Interest allowance9,6007,20016,800Division of net income$41,700$33,300$75,000$80,000 x 12%$60,000 x 12%Remaining income2,1002,1004,200 Dividing IncomeServices of PartnersDec.31 Income Summary75 000 00Jennifer Stone,Capital41 700 00Crystal Mills,Capital 33 300 00 Dividing IncomeLLC AlternativeDec.31 Income Summary75 000 00Jennifer Stone,Member Equity41 700 00Crystal Mills,Member Equity 33 300 00 Dividing IncomeAllowances Exceed Net IncomeAssume the same facts as before except that the net income is only$50,000.J.Stone C.Mills TotalSalary allowance$30,000$24,000$54,000Interest allowance 9,600 7,200 16,800 Total$39,600$31,200$70,800Division of net income$29,200$20,800$50,000Deduct excess equally10,40010,40020,800Partnership DissolutionAdmitting a Partner1.Purchasing an interest from one or more of the current partners.2.Contributing assets to the partnership.A person may be admitted to a partnership only with the consent of all partners by:Partnership DissolutionPurchasing an Interest in a PartnershipPartners Tom Andrews and Nathan Bell have capital balances of$50,000 each.On June 1,each sells one-fifth of his equity to Joe Canter for$10,000 in cash.Partnership DissolutionPurchasing an Interest in a PartnershipJune 1 Tom Andrews,Capital10 000 00Nathan Bell,Capital10 000 00Joe Canter,Capital20 000 00For a LLC,members equity accounts would have been used rather than capital accounts.Partnership DissolutionContributing Assets to a PartnershipPartners Donald Lewis and Gerald Morton have capital balances of$35,000 and$25,000,respectively.On June 1,Sharon Nelson joins the partnership by permission and makes an investment of$20,000 cash.Partnership DissolutionContributing Assets to a PartnershipJune 1 Cash20 000 00Sharon Nelson,Capital20 000 00For a LLC,Sharon Nelson,Member Equity would have been credited.Partnership DissolutionRevaluation of AssetsPartners Donald Lewis and Gerald Morton have capital balances of$35,000 and$25,000,respectively.The balance in Merchandise Inventory is$14,000 and the current replacement value is$17,000.The partners share net income equally.Partnership DissolutionJune 1 Merchandise Inventory3 000 00 Donald Lewis,Capital1 500 00Gerald Morton,Capital1 500 00Because the LLC alternative follows a pattern of replacing“Capital”with“Member Equity,”the LLC entry will not be shown again.Revaluation of AssetsPartnership DissolutionPartner BonusesOn March 1,the partnership of Marsha Jenkins and Helen Kramer admit Alex Diaz as a new partner.The assets of the old partnership are adjusted to a fair market values and the resulting capital balances for Jenkins and Kramer are$30,000 and$24,000,respectively.Partnership DissolutionPartner BonusesJenkins and Kramer agree to admit Diaz as a partner for$31,000.In return,Diaz will receive a one-third equity in the partnership and will share income and losses equally with Jenkins and Kramer.Partnership DissolutionPartner Bonuses from New PartnerEquity of Jenkins$20,000Equity of Kramer24,000Diazs Contribution 31,000Total equity after admitting Diaz$75,000Diazs interest(1/3 x$75,000)$25,000Diazs contribution$31,000Diazs equity after admission 25,000Bonus paid to Jenkins and Kramer$6,000Partnership DissolutionPartner BonusesMar.1 Cash31 000 00 Alex Diaz,Capital25 000 00Marsha Jenkins,Capital3 000 00Helen Kramer,Capital3 000 00$6000 2Partnership DissolutionPartner BonusesAfter adjusting the market values,the capital balance of Janice Cowen is$80,000 and the capital balance of Steve Dodd is$40,000.Ellen Chua receives a one-fourth interest in the partnership for a contribution of$30,000.Before admitting Chua,Cowen and Dodd shared net income using a 2 to 1 ratio.Partnership DissolutionPartner Bonuses to New PartnerEquity of Cowen$80,000Equity of Dodd40,000Chuas Contribution 30,000Total equity after admitting Chua$150,000Chuas interest(1/4 x$150,000)$37,500Chuas contribution$30,000Chuas equity after admission 37,500Bonus paid to Chua$7,500Partnership DissolutionPartner BonusesMar.1 Cash30 000 00 Janice Cowen,Capital5 000 00Steve Dodd,Capital2 500 00Ellen Chua,Capital37 500 001/3 x$7,5002/3 x$7,500Liquidating PartnershipsWhen a partnership goes out of business,the winding-up process is called the liquidation of a partnership.Liquidating PartnershipsThe sale of the assets is called realization.Liquidating PartnershipsFarley,Greene,and Hall share income and losses in a ratio of 5:3:2.On April 9,after discontinuing operations,the firm had the following trial balance.Cash$11,000Noncash Assets64,000Liabilities$9,000Jean Farley,Capital22,000Brad Greene,Capital22,000Alice Hall,Capital 22,000 Total$75,000$75,000Liquidating PartnershipsBetween April 10 and April 30,2006,Farley,Greene,and Hall sell all noncash assets for$72,000.Gain on RealizationLiquidating PartnershipsBalance before realization$11,000$64,000$9,000Left side of statement Noncash Cash Assets LiabilitiesSale of assets and divisionof gain+72,000-64,000Liquidating PartnershipsBalance before realization$22,000$22,000$22,000Right side of statement Farley Greene Hall Capital Capital CapitalSale of assets and divisionof gain+4,000+2,400+1,600$8,000 gain x.50$8,000 gain x.30$8,000 gain x.20Liquidating PartnershipsBalance before realization$11,000$64,000$9,000Left side of statement Noncash Cash Assets LiabilitiesSale of assets and divisionof gain+72,00064,000 Balance after realization$83,000$0$9,000Liquidating PartnershipsBalance before realization$22,000$22,000$22,000Right side of statement Farley Greene Hall Capital Capital CapitalSale of assets and divisionof gain +4,000 +2,400 +1,600Balance after realization$26,000$24,400$23,600Liquidating PartnershipsThe partnerships liabilities are paid,$9,000.Gain on RealizationLiquidating PartnershipsLeft side of statement Noncash Cash Assets LiabilitiesBalance before realization$11,000$64,000$9,000Sale of assets and divisionof gain+72,00064,000 Balance after realization$83,000$0$9,000Payment of liabilities9,0009,000Liquidating PartnershipsLeft side of statement Noncash Cash Assets LiabilitiesBalance before realization$11,000$64,000$9,000Sale of assets and divisionof gain+72,00064,000 Balance after realization$83,000$0$9,000Payment of liabilities 9,000 9,000Balance after payment$74,000$0$0Liquidating PartnershipsThe remaining cash,$74,000,is paid to each partner in accordance with the partners capital balance.Gain on RealizationLiquidating PartnershipsLeft side of statement Noncash Cash Assets LiabilitiesBalance before realization$11,000$64,000$9,000Sale of assets and divisionof gain+72,00064,000 Balance after realization$83,000$0$9,000Payment of liabilities 9,000 9,000Balance after payment$74,000$0$0Partners cash distributed74,000 Final balances$0$0$0Liquidating PartnershipsRight side of statementBalance before realization$22,000$22,000$22,000 Farley Greene Hall Capital Capital CapitalSale of assets and divisionof gain +4,000 +2,400 +1,600Balance after realization$26,000$24,400$23,600Payment of liabilities Balance after payment$26,000$24,400$23,600Partners cash distributed26,00024,400 23,600Final balances$0$0$0Liquidating PartnershipsSale of AssetsApr.30 Cash72 000 00 Noncash Assets64 000 00Gain on Realization8 000 00Liquidating PartnershipsDivision of GainApr.30 Gain on Realization8 000 00 Jean Farley,Capital4 000 00Brad Greene,Capital2 400 00Alice Hall,Capital1 600 00Liquidating PartnershipsPayment of LiabilitiesApr.30 Liabilities9 000 00 Cash9 000 00Liquidating PartnershipsDistribution of Cash to PartnersApr.30 Jean Farley,Capital26 000 00Brad Greene,Capital24 400 00Alice Hall,Capital23 600 00Cash74 000 00Liquidating PartnershipsBetween April 10 and April 30,2006,Farley,Greene,and Hall sell all noncash assets for$44,000.Loss on RealizationLiquidating PartnershipsBalance before realization$11,000$64,000$9,000Left side of statement Noncash Cash Assets LiabilitiesSale of assets and divisionof loss+44,00064,000Liquidating PartnershipsBalance before realization$22,000$22,000$22,000Right side of statement Farley Greene Hall Capital Capital CapitalSale of assets and divisionof loss10,0006,0004,000$20,000 loss x.50$20,000 loss x.30$20,000 loss x.20Liquidating PartnershipsBalance before realization$11,000$64,000$9,000Left side of statement Noncash Cash Assets LiabilitiesSale of assets and divisionof loss+44,00064,000 Balance after realization$55,000$0$9,000Liquidating PartnershipsBalance before realization$22,000$22,000$22,000Right side of statement Farley Greene Hall Capital Capital CapitalSale of assets and divisionof loss 10,000 6,000 4,000Balance after realization$12,000$16,000$18,000Liquidating PartnershipsThe liabilities of the partnership are paid,$9,000.Loss on RealizationLiquidating PartnershipsLeft side of statement Noncash Cash Assets LiabilitiesBalance before realization$11,000$64,000$9,000Sale of assets and divisionof loss+44,00064,000 Balance after realization$55,000$0$9,000Payment of liabilities9,0009,000Liquidating PartnershipsLeft side of statement Noncash Cash Assets LiabilitiesBalance before realization$11,000$64,000$9,000Sale of assets and divisionof loss+44,00064,000 Balance after realization$55,000$0$9,000Payment of liabilities 9,000 9,000Balance after payment$46,000$0$0Liquidating PartnershipsThe remaining cash,$46,000,is paid to each partner in accordance with the partners capital balance.Loss on RealizationLiquidating PartnershipsLeft side of statement Noncash Cash Assets LiabilitiesBalance before realization$11,000$64,000$9,000Sale of assets and divisionof loss+44,00064,000 Balance after realization$55,000$0$9,000Payment of liabilities 9,000 9,000Balance after payment$46,000$0$0Partners cash distributed46,000 Final balances$0$0$0Liquidating PartnershipsRight side of statementBalance before realization$22,000$22,000$22,000 Farley Greene Hall Capital Capital CapitalSale of assets and divisionof loss10,000 6,000 4,000Balance after realization$12,000$16,000$18,000Payment of liabilities Balance after payment$12,000$16,000$18,000Partners cash distributed12,00016,000 18,000Final balances$0$0$0Liquidating PartnershipsSale of AssetsApr.30 Cash44 000 00Loss on Realization20 000 00Noncash Assets64 000 00Liquidating PartnershipsDivision of LossBrad Greene,Capital6 000 00Alice Hall,Capital4 000 00Loss on Realization20 000 00Apr.30 Jean Farley,Capital10 000 00Liquidating PartnershipsPayment of LiabilitiesApr.30 Liabilities9 000 00 Cash9 000 00Liquidating PartnershipsDistribution to PartnersApr.30 Jean Farley,Capital12 000 00Brad Greene,Capital16 000 00Alice Hall,Capital18 000 00Cash46 000 00Lifecycle of a BusinessBusiness StagePrincipal AdvantageDellas Delights,ProprietorshipJeff Jacobi,ProprietorForm easily:Jacobi forms a business by obtaining a local business license and opening a bank account.Dellas Delights,PartnershipJacobi and Lange,PartnersExpand capital and expertise:Jacobi admits a new partner that contributes capital and expertise.ContinuedLifecycle of a BusinessBusiness StagePrincipal AdvantageDellas Delights,LLCLimit legal liability:The partnership is changed to an LLC to limit legal liability of owners.Dellas Delights,Inc.Simplify raising capital:The LLC is changed to a corporation to raise capital from the public.ContinuedLifecycle of a BusinessBusiness StagePrincipal AdvantageDellas Delights,Inc.a division of International Foods,Inc.Provide exit:The company is sold for cash.A venture capitalist is an individual or firm that provides equity financing for a new company.The EndThe EndChapter 13
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