E 12-1

E 12-1

The main advantage of organizing a business as a partnership, rather than as a proprietorship, is the ability to bring together the capital, talents, and experiences of the partners. Two or more owners can provide more capital than a single owner. Like a proprietorship, the partnership pays no business income tax. Instead, the partnership income is taxed as personal income to the partners. If organized as an S corporation, the business’s income would still be taxed as personal income to the owners.

The partnership form of business has some disadvantages. Partnerships are somewhat like marriages. Optimism at the start can turn sour if the partners do not get along well.

Each partner can bind the business to a contract that gives each other partner unlimited personal liability for the debts of the business if it cannot pay. One partner making some mistakes or acting in an undesirable manner can create losses for the other partner(s). In the extreme case, a partner may grow disenchanted with participation in the business.

If a partner leaves the business, the old partnership ceases to exist, and reorganization becomes necessary. Preparing a partnership agreement can consume lots of time and energy.

(10-15 min.) E 12-2

Journal
DATE	ACCOUNTS AND EXPLANATIONS	POST. REF.	DEBIT	CREDIT
	Cash		16,300
	Accounts Receivable		10,600
	Office Furniture ($2,700 ! $1,100)		1,600
	Building		71,000
	Allowance for Uncollectible Accounts			2,900
	Accounts Payable			3,300
	Note Payable			10,000
	Accrued Expenses Payable			1,200
	Flute, Capital			82,100
	To record Flute’s investment in the
	partnership.

(15-20 min.) E 12-3

Partners’ shares of net income and net loss:

	NET INCOME (NET LOSS)
	MEPPEN	QUAID	TOTAL
a. Half to each partner	$(26,000)	$(26,000)	$(52,000)

b. Meppen
($40,000 / $110,000 ´ $77,000)	$ 28,000
Quaid			$ 77,000
($70,000 / $110,000 ´ $77,000)		$ 49,000

c. Meppen
($40,000 / $110,000 ´ $33,000)	$(12,000)
Quaid			$(33,000)
($70,000 / $110,000 ´ $33,000)		$(21,000)

d. Total net income			$ 98,000
Sharing of first $60,000 based
on capital contributions:
Meppen
($40,000/$110,000 ´ $60,000)	$ 21,818
Quaid
($70,000/$110,000 ´ $60,000)		$ 38,182	60,000
Net income left for allocation			38,000
Sharing based on service:
Meppen ($30,000 ´ .30)	9,000
Quaid ($30,000 ´ .70)		21,000	30,000
Net income left for allocation			8,000
Balance shared equally:
Meppen ($8,000 ´ 1/2)	4,000
Quaid ($8,000 ´ 1/2)		4,000	8,000
Net income left for allocation	________	_________	$ -0-
Net income allocated to the
partners	$ 34,818	$ 63,182	$ 98,000

(5-10 min.) E 12-4

Journal
DATE		ACCOUNTS AND EXPLANATIONS	POST. REF.	DEBIT	CREDIT
	a.	Income Summary		98,000
		Meppen, Capital			34,818
		Quaid, Capital			63,182

	b.	Meppen, Capital		47,000
		Meppen, Drawing			47,000

		Quaid, Capital		53,000
		Quaid, Drawing			53,000

Overall, partnership capital decreased by $2,000 [net income of $98,000 minus total partner drawings of $100,000 ($47,000 + $53,000)].

(10-15 min.) E 12-5

Partners’ equity in the partnership:




a. Falco’s balance	$ 50,000
Graham’s balance	100,000
Ott’s balance	-0-

b. Partnership capital before Falco is admitted
($100,000 + $50,000)	$150,000
Falco’s investment	75,000
Partnership capital after Falco is admitted	$225,000

Falco’s capital in the partnership
($225,000 ´ 1/3)	$ 75,000
Graham’s capital in the partnership	100,000
Ott’s capital in the partnership	50,000
Total partnership capital	$225,000

c. Partnership capital before Falco is admitted
($100,000 + $50,000)	$150,000
Falco’s investment	60,000
Partnership capital after Falco is admitted	$210,000

Falco’s capital in the partnership
($210,000 ´ 1/4)	$ 52,500
Graham’s capital in the partnership
$100,000 + [($60,000 ! $52,500) ´ 1/2]	103,750
Ott’s capital in the partnership
$50,000 + [($60,000 ! $52,500) ´ 1/2]	53,750
Total partnership capital	$210,000

(5-10 min.) E 12-6

Journal
DATE		ACCOUNTS AND EXPLANATIONS	POST. REF.	DEBIT	CREDIT
	a.	Ott, Capital		50,000
		Falco, Capital			50,000

	b.	Cash		75,000
		Falco, Capital			75,000

	c.	Cash		60,000
		Falco, Capital			52,500
		Graham, Capital ($7,500 ´ 1/2)			3,750
		Ott, Capital ($7,500 ´ 1/2)			3,750

(5-10 min.) E 12-7




1.	Echols’ owner’s equity before asset write-down	$60,000
	Echols’ share of asset write-down ($45,000 ´ 1/3)	(15,000)
	Echols receives assets of	$45,000

2.	Schaeffer’s owner’s equity before asset write-down	$80,000
	Schaeffer’s share of asset write-down ($45,000 ´ 2/3)	(30,000)
	Schaeffer’s owner’s equity to begin the proprietorship	$50,000

(10-15 min.) E 12-8

	Journal
	DATE		ACCOUNTS AND EXPLANATIONS	POST. REF.	DEBIT	CREDIT
a.	May	31	Bermuda, Capital ($12,000 ´ 5/10)		6,000
			Rye, Capital ($12,000 ´ 3/10)		3,600
			Augustine, Capital ($12,000 ´ 2/10)		2,400
			Inventory			12,000
			To revalue the inventory and allocate
			the loss to the partners.

		31	Land		32,000
			Bermuda, Capital ($32,000 ´ 5/10)			16,000
			Rye, Capital ($32,000 ´ 3/10)			9,600
			Augustine, Capital ($32,000 ´ 2/10)			6,400
			To revalue the land and allocate
			the gain to the partners.

b.	May	31	Bermuda, Capital
			($36,000 ! $6,000 + $16,000)		46,000
			Rye, Capital ($4,000* ´ 3/5)		2,400
			Augustine, Capital ($4,000* ´ 2/5)		1,600
			Cash			25,000
			Note Payable to E. Bermuda			25,000
			To record withdrawal of Bermuda
			from the partnership.

*Bermuda received partnership cash ($25,000) and a

note of $25,000, a total settlement of...............….. $50,000

Bermuda’s capital balance at time of withdrawal..... (46,000)

Loss to be shared by the other partners...............….. $ 4,000

(5-10 min.) E 12-9

Req. 1

Each partner receives cash equal to his capital balance because cash ($54,000) equals total partnership capital:

Barry.................................. $23,000

McCall…………………... 20,000

Flaten................................. 11,000

Total.................................. $54,000

Req. 2

Barry receives cash of $20,000 {$23,000 ! [($54,000 ! $45,000) ´ 1/3]}.

McCall receives cash of $17,000 {$20,000 ! [($54,000 ! $45,000) ´

1/3]}.

Flaten receives cash of $8,000 {$11,000 ! [($54,000 ! $45,000) ´ 1/3]}

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