Chanter 2: Accounting for partnership

 Accounting for Partnerships

A Partnership: is association of two or more persons to carry on a business for profit as co-owner.

 Organizations with partnership characteristics:

1) General partnership: partners have unlimited personal liability for unpaid debts of the partnership.
2) Limited partnerships (LP): some partners are unwilling to accept the risk of unlimited lability. At least one partner
must be a general partner, who do management duties and unlimited liability for the debts of the partnership.
3) The limited partners have no personal liabilities beyond the amounts the invest in the partnership

1-Formation of partnership

When Two or more partners want to form a partnership, each partner must pay share in capital.

Note that: this share may be cash or other assets or assets and liabilities.

Example: A and B formed a partnership by following contributions:

A contributes cash of $ 20.000 and land costing $ 80,000 and fair market value of the land is $ 100,000,

B contributes cash of $ 25,000 and building costing $ 40,000 and account payable of $ 10,000.

Required:

1-Record the formation of the partnership.

2-Prepare the balance sheet at the formation date.

1-(A):

Cash 20,000
Land 100,000
A. capital 120,000

Cash 25,000
Building 40,000
A/P 10,000
B. capital 55,000

Mr. Amir Rabie

 Chanter 2: Accounting for partnership
In one Journal: -

Cash 45,000
Land 100,000
Building 40.000 10,000
A/P 120,000
A. capital 55,000
B. capital
2-

Balance Sheet
Assets : Liabilities :
• Cash 45,000 • A/P 10,000
• Land 100,000 Owner’s equity:
• building 40,000 • Capital.A 120,000
• Capital.B 55,000
Total Assets 185,000 Total liabilities and 185,000
equity

Example: A and B formed a partnership by the following contribution-

(A) Contributes cash of $ 40.000, land costing $ 30,000 and they agreed that FMV of the land is $ 40,000 and equipment
costing $ 90,000, acc -depreciation of equipment $ 20.000.

(B) Contributes cash of $ 30.000, A/R of $ 50.000 less allowance for doubtful account of $ 10,000. building costing $
170,000 Acc dear. C the building $ 70,000 and FMV of the building is $ 80,000 and notes payable of $ 25.000.

Required:- Record the formation of the partnership.

Solve:-

(A)

Cash 40,000
Land 40,000
Equipment 70,000
A.capital 150,000

Mr. Amir Rabie

 Chanter 2: Accounting for partnership
(B)

Cash 30,000
A/R 50,000
Building 80,000
All.DFA 10,000
N/P 25,000
B.capital 125,000

In one Journal:-

Cash 70,000
Land 40,000
A/R 50,000
Equipment 70,000
Building 80,000
All.DFA 10,000
N/P 25,000
A.capital 150,000
B.capital 125,000

Note that: -

1-Assets contributed by any partner will be recorded at their fair market value (decided or agreed value)

2-If we have: equipment costing $ 60.000

Acc-depr. Equipment $ 20,000

So, equipment will be recorded $ 40,000

3-If we have: equipment costing $ 60,000

Acc-depr. Equipment $ 20,000

FMV - equipment $35,000

So, equipment will be recorded $ 35,000

Mr. Amir Rabie

 Chanter 2: Accounting for partnership
4- Allowance for doubtful accounts is recorded (Cr).

5- Accumlated-depreciotion Will not be recorded.

6- Net receivable: Gross receivable. -All DFA

Example: - A and B formed a partnership by the following contributions: -

A, contributes B, contributes:
Cash $25,000 Cash $20,000
Land Costing $50,000 Receivable (net) $30,000
FMV $75,000 All.DFA $5,000
Equipment $90,000 Building $ 110,000
Acc-depr. Equipment $30,000 FMV $130,000
A/P $10,000
Required: - Record the formation of the partnership.

Solve:-

(A):

Cash 25,000
Land 75,000
Equipment 60,000
A. capital 160,000

(B):

Cash 20,000
Receivable (gross) 35,000
Building 130,000
All.DFA 5,000
A/P 10,000
B, capital 170,000

Mr. Amir Rabie

 Chanter 2: Accounting for partnership
Try to solve:

Tom and Julie formed a management consulting partnership on January 1,2015 the fair value of the net assets invested by
each partner follows:

Tom Julie
Cash 13,000 12,000
Account receivable 8,000 6,000
Office supplies 2,000 800
Office equipment 30,000
Land 30,000
Account payable 2,000 5,000
Mortgage 18,800

• Prepare Journal entries to record the initial investment in the [partnership for Tom and Julie.

Mr. Amir Rabie