Slide AKT 307 AKL 1 12

(1)

Partnerships:

Formation,

Operation, and

Changes in

Membership

Baker / Lembke / King

(2)



_{Association of two or more persons}

_.

_The

“persons” are usually individuals; however,

they could be corporations or other

partnerships.



_{To invest something}

_.

_{This means that each}

partner must contribute something to the

partnership.



_{Business for profit}

_.

_{A partnership may be}

formed to perform any legal business, trade,

profession, or other service.

(3)



_{The name of the partnership and the}

names of the partners.



_{The name of business to be}

conducted by the partnership and

the duration of the partnership

agreement.



_{The initial capital contribution of}

each partner and the method by

which future capital contributions



_{The name of the partnership and the}

names of the partners.



_{The name of business to be}

conducted by the partnership and

the duration of the partnership

agreement.



_{The initial capital contribution of}

each partner and the method by

which future capital contributions

(4)



_{A complete specification of the}

profit or loss distribution, including

salaries.



_{Procedures used for Citranges in the}

partnership.



_{Other aspects of operating the}

partners decide on, such as the

management rights of each partners,

election procedures, and accounting



_{A complete specification of the}

profit or loss distribution, including

salaries.



_{Procedures used for Citranges in the}

partnership.



_{Other aspects of operating the}

partners decide on, such as the

management rights of each partners,

election procedures, and accounting

(5)

>

_{A separate accounting entity}

>

_{Use fair market value for assets and liabilities}

Accounting for Partnership Formation

January 1, 19X1

Cash

13,000,000

Inventory

9,000,000

Equipment

19,000,000

Liabilities

11,000,000

Aldi, Capital

20,000,000

Bayu, Capital

10,000,000

Fair

Market

(6)



_{Preselected ratio}



_{Interest on capital}

balances



_{Salaries to partners}



_{Bonuses to partners}



_{Preselected ratio}



_{Interest on capital}

balances



_{Salaries to partners}



_{Bonuses to partners}

(7)

Aldi Bayu Total

Profit sharing percentage 60% 40% 100%

Net income Rp10,000,000

Allocate 60:40 Rp6,000,000 Rp4,000,000 (10,000,000) Total Rp6,000,000 Rp4,000,000 Rp -0-

Profit Allocation

During 19X1, the AB Partnership earns a profit of Rp10,000,000 for the year. Aldi Maintains a capital balance of Rp20,000,000 during the year and Bayu’s

capital investment fluctuates between Rp10,000,000 and Rp6,500,000.

During 19X1, the AB Partnership earns a profit of Rp10,000,000 for the year. Aldi Maintains a capital balance of Rp20,000,000 during the year and Bayu’s

capital investment fluctuates between Rp10,000,000 and Rp6,500,000

.

(8)

Year-End Entries

Bayu, Capital

4,000,000

Bayu, Drawing

4,000,000

During the year, Bayu withdrew Rp4,000,000 from

the business. A closing entry is needed to reflect

this reduction in Bayu, Capital.

Income Summary

10,000,000

Aldi, Capital

6,000,000

Bayu, Capital

4,000,000

Another entry is required to distribute the profit in

accordance with the partnership agreement.

(9)

Interest on Capital Balances

Bayu’s Weighted-Average Capital Balance

Months Months Times Date Debit Credit Balance Maintained Dollar Balance

January 1 Rp10,000,000 4 Rp 40,000,000 May 1 Rp3,000,000 7,000,000 4 28,000,000 September 1 Rp500,000 7,500,000 2 15,000,000 November 1 1,000,000 6,500,000 2 13,000,000

Total 12 Rp96,000,000

Average capital: Rp96,000,000



12 months =

Rp8,000,000

Average capital: Rp96,000,000



12 months =

(10)

Interest on Capital Balances

Aldi and Bayu agreed to allow interest of 15 percent on the weighted-average capital balances with any

remaining profit to be distributed 60:40 percent.

Aldi and Bayu agreed to allow interest of 15 percent on the weighted-average capital balances with any

remaining profit to be distributed 60:40 percent.

Aldi Bayu Total

Profit percentage 60% 40% 100% Average capital Rp20,000,000 Rp8,000,000

Net income Rp10,000,000

Interest on average capital Rp 3,000,000 Rp1,200,000 (4,200,000)

Residual income Rp 5,800,000

Allocate 60:40 Rp 3,480,000 Rp2,320,000 (5,800,000) Total Rp 6,480,000 Rp3,520,000 Rp -0-

(11)

Interest on Capital Balances

The partnership agreement provides for salaries of Rp2,000,000 to Aldi and Rp5,000,000 to Bayu. Any remainder is to be distributed in a ratio of 60:40 percent.

Aldi Bayu Total

Profit percentage 60% 40% 100%

Net income Rp10,000,000

Salary Rp2,000,000 Rp5,000,000 (7,000,000)

Residual income Rp 3,000,000

Allocate 60:40 1,800,000 1,200,000 (3,000,000) Total Rp3,800,000 Rp6,200,000 Rp -0-

(12)

Bonuses

A bonus of 10 percent of income in excess of Rp5,000,000 is to be credited to Bayu’s capital

account before distributing remaining profit.

A bonus of 10 percent of income in excess of Rp5,000,000 is to be credited to Bayu’s capital

account before distributing remaining profit.

Bonus = .10 (Net income - Minimum income)

Bonus = .10 (Rp10,000,000 - Rp5,000,000)

Bonus =

Rp500,000

Case 1: The bonus is computed as a percentage

of income before subtracting the bonus.

(13)

Bonuses

A bonus of 10 percent of income in excess of Rp5,000,000 is to be credited to Bayu’s capital

account before distributing remaining profit.

A bonus of 10 percent of income in excess of Rp5,000,000 is to be credited to Bayu’s capital

account before distributing remaining profit.

Bonus = .10 (Net income - Minimum income -Bonus)

Bonus = .10 (Rp10,000,000 - Rp5,000,000 - Bonus)

Bonus = .10 (Rp5,000,000 - Bonus)

Bonus = Rp500,000 - .10 Bonus

1.10 Bonus = Rp500,000

Case 2: The bonus is computed as a percentage

of income after subtracting the bonus.

(14)

Bonuses

The distribution of net income based on Case 2 (bonus of Rp454.55) is calculated as follows:

Aldi Bayu Total

Profit percentage 60% 40% 100%

Net income Rp10,000,000

Bonus to partner (rounded) Rp 455 (455)

Residual income Rp 9,545

Allocation 60:40 Rp5,727 3,818 (9,545) Total Rp5,727 Rp4,273 Rp -0-

(15)

Multiple Bases for Profit Allocation

1. Interest of 15 percent on weighted-average

capital balances.

2. Salaries of Rp2,000,000 for Aldi and

Rp5,000,000 for Bayu.

3. A bonus of 10 percent to be paid to Bayu on

partnership income exceeding Rp5,000,000

before subtracting the bonus, partners’

salaries, and interest on capital balances.

4. Any residual to be allocated in the ratio of 60

1. Interest of 15 percent on weighted-average

capital balances.

2. Salaries of Rp2,000,000 for Aldi and

Rp5,000,000 for Bayu.

3. A bonus of 10 percent to be paid to Bayu on

partnership income exceeding Rp5,000,000

before

subtracting the bonus, partners’

salaries, and interest on capital balances.

4. Any residual to be allocated in the ratio of 60

(16)

Multiple Bases for Profit Allocation

Aldi Bayu Total

Profit percentage 60% 40% 100% Average capital Rp20,000,000 Rp8,000,000

Net income Rp10,000,000

Step 1:

Interest on average capital Rp 3,000,000 Rp1,200,000 (4,200,000) Remaining after step 1 Rp 5,800,000

Step 2:

Salary 2,000,000 5,000,000 (7,000,000) Deficiency after step 2 Rp(1,200,000)

Step 3:

Bonus 500,000 (500,000) Deficiency after step 3 Rp(1,700,000)

Step 4:

(17)

Partnership Financial Statement

AB Partnership

Statement of Partners’ Capital

For the Year Ended December 31, 19X1

Aldi Bayu Total

Balance, January 1, 19X1 Rp20,000,000Rp10,000,000 Rp30,000,000 Add: Additional investment 500,000 500,000

Net income distribution 3,980,000 6,020,000 10,000,000 Rp23,980,000Rp16,520,000 Rp40,500,000 Less: Withdrawal (4,000,000) (4,000,000) Balance, December 31, 19X1 Rp23,980,000Rp12,520,000 Rp36,500,000

(18)

New Partner PurCitrases an Interest

On January 1, 19X3, Aldi and Bayu invite Citra to become a partner in their business. Citra purCitrases a one-fourth interest in the partnership capital directly from Aldi and Bayu by paying Rp5,900,000 to Aldi and Rp3,100,000 to Bayu. Citra

will have a capital credit of Rp7,500,000 (25 percent). Citra will be entitled to 25 percent interest in the profits or losses of

the partnership. The remaining 75 percent interest will be divided between Aldi and Bayu in their old profit ratio of 60:40.

,000

to Bayu. Citra

will have a capital credit of Rp7,500

,000

(25 percent). Citra will be entitled to 25 percent interest in the profits or losses of

the partnership. The remaining 75 percent interest will be divided between Aldi and Bayu in their old profit ratio of 60:40.

Aldi, Capital (Rp20,000,000 x .25) 5,000,000 Bayu, Capital (Rp10,000,000 x .25) 2,500,000

(19)

New Partner Invests in Partnership

Case 1: The total book value of the partnership before the admission of Citra is Rp30,000,000. Citra buys one-fourth interest for Rp10,000,000.

Cash 10,000,000

Citra, Capital (Rp40,000,000 x .25) 10,000,000

Case 2: The total book value of the partnership before the admission of Citra is Rp30,000,000. Citra buys one-fourth interest for Rp11,000,000 (bonus method).

Cash 11,000,000

Aldi, Capital (Rp750 x .60)

450,000

(20)

Step 1:

25% of estimated total resulting capital Rp11,000,000

Estimated total resulting capital

(Rp11,000,000



.25)

Rp44,000,000

Step 2:

Estimated total resulting capital

Rp44,000,000

Total net assets not including goodwill

(Rp30,000,000



Rp11,000,000)

(41,000,000)

Estimated goodwill to prior partners

Rp 3,000,000

Recording Goodwill of Prior Partners

Case 2: Citra pays Rp11,000,000 for a one-fourth interest and goodwill to prior partners is recognized.

(21)

Recording Goodwill of Prior Partners

Case 2: Citra pays Rp11,000,000 for a one-fourth interest and goodwill to prior partners is recognized.

Goodwill 3,000,000

Aldi, Capital (Rp3,000,000 x .60) 1,800,000 Bayu, Capital (Rp3,000,000 x .40) 1,200,000

Cash 11,000,000

(22)

Revaluation of Assets Approach

Case 3: Citra offers Rp8,000,000 for a one-fourth interest in the partnership. It was determined that the inventory

currently recorded at a book value of Rp14,000,000 has a fair value of only Rp8,000,000. The partners agree to a write-down of inventory before admitting Citra.

Case 3: Citra offers Rp8,000,000 for a one-fourth interest in the partnership. It was determined that the inventory

currently recorded at a book value of Rp14,000,000 has a fair value of only Rp8,000,000. The partners agree to a write-down of inventory before admitting Citra.

Aldi, Capital (Rp6,000,000 x .60) 3,600,000 Bayu, Capital (Rp6,000,000 x .40) 2,400,000

Inventory 6,000,000

Citra invests Rp8,000,000 in the partnership.

Cash 8,000,000

(23)

Recording Goodwill for New Partner

Case 3: Aldi, Bayu, and Citra agree Aldi and Bayu should retain 75 percent interest in the partnership.

Cash 8,000,000

Goodwill 2,000,000

Step 1:

75% of estimated total resulting capital Rp30,000,000 Estimated total resulting capital

(Rp30,000,000  .75) Rp40,000,000

Step 2:

Estimated total resulting capital Rp40,000,000 Total net assets not including goodwill

(Rp30,000,000  Rp8,000,000) (38,000,000)

(24)



Bonus to retiring partner



Asset revaluation and then payment to retiring

partner



Goodwill to retiring partner:



Only recognize retiring partner’s share of goodwill



Recognize all goodwill

Retirement of a Partner from Partnership

(25)

The

End

The

End

(1)

Irwin/McGraw-Hill

Step 1:

25% of estimated total resulting capital Rp11,000,000

Estimated total resulting capital

(Rp11,000,000



.25)

Rp44,000,000

Step 2:

Estimated total resulting capital

Rp44,000,000

Total net assets not including goodwill

(Rp30,000,000



Rp11,000,000)

(41,000,000)

Estimated goodwill to prior partners

Rp 3,000,000

Recording Goodwill of Prior Partners

Case 2: Citra pays Rp11,000,000 for a one-fourth interest and goodwill to prior partners is recognized.

(2)

Recording Goodwill of Prior Partners

Case 2: Citra pays Rp11,000,000 for a one-fourth interest and goodwill to prior partners is recognized.

Goodwill 3,000,000

Aldi, Capital (Rp3,000,000 x .60) 1,800,000 Bayu, Capital (Rp3,000,000 x .40) 1,200,000

Cash 11,000,000

(3)

Irwin/McGraw-Hill

Revaluation of Assets Approach

Case 3: Citra offers Rp8,000,000 for a one-fourth interest in the partnership. It was determined that the inventory

currently recorded at a book value of Rp14,000,000 has a fair value of only Rp8,000,000. The partners agree to a write-down of inventory before admitting Citra.

Case 3: Citra offers Rp8,000,000 for a one-fourth interest in the partnership. It was determined that the inventory

currently recorded at a book value of Rp14,000,000 has a fair value of only Rp8,000,000. The partners agree to a write-down of inventory before admitting Citra.

Aldi, Capital (Rp6,000,000 x .60) 3,600,000 Bayu, Capital (Rp6,000,000 x .40) 2,400,000

Inventory 6,000,000

Citra invests Rp8,000,000 in the partnership.

Cash 8,000,000

(4)

Recording Goodwill for New Partner

Case 3: Aldi, Bayu, and Citra agree Aldi and Bayu should retain 75 percent interest in the partnership.

Cash 8,000,000

Goodwill 2,000,000

Step 1:

75% of estimated total resulting capital Rp30,000,000 Estimated total resulting capital

(Rp30,000,000  .75) Rp40,000,000

Step 2:

Estimated total resulting capital Rp40,000,000 Total net assets not including goodwill

(Rp30,000,000  Rp8,000,000) (38,000,000)

(5)

Irwin/McGraw-Hill



Bonus to retiring partner



Asset revaluation and then payment to retiring

partner



Goodwill to retiring partner:



Only recognize retiring partner’s share of goodwill



Recognize all goodwill

Retirement of a Partner from Partnership

(6)