AK2103

Akuntansi Keuangan Lanjutan

Chapter 9
Partnerships – Formations,
Operations, and Changes in
Ownership Interests
Unit Overview
Partnership accounting procedures are similar to those for
other forms of business organization, except for procedures
relating to the measurement of partnership capital
interests. Accounting measurements relating to the capital
and income interests of partners are based on the
partnership agreement. The partnership agreement should
be in writing and should cover matters relating to the
amount and valuation of capital contributions, additional
investments with withdrawals, loans to partners, profit-
sharing arrangements, changes in partnership interests,
and various other matters.
Unit Objectives
1. Comprehend the legal characteristics of
partnerships.
2. Understand initial investment valuation and record
keeping.
3. Grasp the diverse nature of profit- and loss-sharing
agreements and their computation.
4. Value a new partners’s investment in an existing
partnership.
5. Value a partner’s share on retirement or death.
6. Understand limited liability partnership
characteristics
Contents
1. Partnership Characteristics
2. Initial Investment
3. Profit and Loss Sharing Agreements
4. Admitting a New Partner
5. Death or Retirement of a Partner
6. Limited Partnerships
 CONTENT 1
Partnership Characteristics
Partnerships
RUPA "Revised Uniform Partnership Act“
• Has been adopted by most states
• Entity theory:
• partners own their share of the partnership, but not its
individual assets
• Dissociation:
• partners can dissociate without dissolution of the
partnership

Partners have
– Mutual agency – the ability to legally bind the
partnership
– Unlimited liability – liable for partnership debts,
including the use of personal assets
Articles of Partnership
The partnership agreement should specify:
1. Products or services, line of business
2. Partner rights and responsibilities
3. Initial investment and value assigned to
noncash investments
4. Additional investment conditions
5. Asset withdrawal provisions
6. Profit and loss sharing
7. Dissolution procedures
Partnership Reporting
Financial reporting should provide for the needs of
● Partners
● Creditors of the partnership
● IRS – Partnerships do not pay federal income
taxes, but partnership information returns
allow the IRS to verify that each partner pays
income taxes on his/her share of partnership
income.
 CONTENT 2
Initial Invesment
Accounting for a Partnership Formation
Illustration: Assume that A. Lau and T. Song combine their
proprietorships to start a partnership named Lau-Song Software.
Lau and Song have the following assets prior to the formation of
the partnership.
Book Value Fair Value
A. Lau T. Song A. Lau T. Song
Cash ¥8,000 ¥9,000 ¥8,000 ¥9,000
Equipment 5,000 4,000
Accumulated depreciation (2,000)
Accounts receivable 4,000 4,000
Allowance for doubtful accounts (700) (1,000)
¥11,000 ¥12,300 ¥12,000 ¥12,000
ILLUSTRATION 12.3
Accounting for a Partnership Formation
Illustration: Prepare the journal entry to record the investment in
A. Lau.
Cash 8,000
Equipment 4,000
A. Lau, Capital 12,000
Prepare the entry to record the investment of T. Song.
Cash 9,000
Accounts Receivable 4,000
Allowance for Doubtful Accounts 1,000
T. Song, Capital 12,000
Initial Investment
A partnership is started by Ash and Bec, each investing
cash.
Cash 20,000
Ash Capital 20,000
Cash 20,000
Bec Capital 20,000

If Bec invests other assets, the value of those assets

should be agreed upon in advance.
Cash XXX
Equipment XXX
Land XXX
Bec Capital XXX
Bonus or Goodwill on Initial Investment

Partner initial investments may not represent

ownership percentage. Partners may bring
● Individual talent
● Business connections
● Customer base
● Intellectual know-how
Partners choose method to record their capital.
• Bonus method
− Adjustment within the capital accounts
• Goodwill method
− Goodwill is recorded on the books
 Initial Investment with Bonus
Total fair value received is split, as desired, between
partner capital accounts.

For example: Col contributes assets of $50,000, and Cro

contributes assets of $42,000. They agree to have equal
shares: 92 / 2 = $46 each.
Col Cro Cash 7
Cash - 7,000 Inventory 35
Land 10,000 - Land 10
Building 40,000 - Building 40
Inventory items - 35,000 Col, Capital 50
Total 50,000 42,000 Cro, Capital 42
Initial Investment with Bonus (continued)

• Increase Cro’s capital and decrease Col’s capital

by $4,000.

Col, Capital 4,000

Cro, Capital 4,000
Initial Investment with Goodwill
The partner contributing the greater fair value sets the implied
value of the partnership, and goodwill is recorded to make up
the difference for the partner who invested the lesser amount.

In the Col and Cro partnership:

Col's: (10 + 40) / 50% = $100
Cro's: (7 + 35) / 50% = $84

Use Col’s investment to determine implied value of firm -- $100.

Initial Entry with Goodwill

Col's 50%($100) $50 Cro's 50%($100) $50

He invests: He invests:
Land $10 Cash $7
Building $40 $50 Inventory $35 $42
Goodwill $8

Goodwill 8,000
Cro, Capital 8,000
Additional Partner Transactions

Each partner has his/her own accounts for

–Capital (the balance of a partner’s equity)
–Drawings (periodic amounts, similar to a salary)
–Withdrawals (other large or unusual amounts)
Additional investments increase Capital.
Drawings and withdrawals reduce Capital.
Income Summary (Revenue and Expense Summary) is
closed to Capital.
 Partner Closing Entries
Revenue and Expense Summary 34,500
Rat capital 20,700
Drawings / Yan capital 13,800
withdrawals
are closed
to individual
capital Rat capital 6,000
accounts. Yan capital 9,000
Rat drawing 6,000
Yan drawing 9,000

Income is shared between the partners. A loss

would cause the entry to be reversed. It is
possible for some partners to have losses overall
while others have profits.
 Statement of Partners' Capital
RAT AND YAN
STATEMENT OF PARTNER’S CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2016
60% Rat 40% Yan Total
Capital balances January 1, 2016 $40,000 $35,000 $75,000
Add: Additional investments 5,000 -- 5,000
Deduct: Withdrawals -- (3,000) (3,000)
Deduct: Drawings (6,000) (9,000) (15,000)
Net contributed capita; 39,000 23,000 62,000
Add: Net income for 2016 20,700 13,800 34,500
Capital balances December 31, 2016 $59,700 $36,800 $96,500

Beginning capital + investments – drawings and/or

withdrawals + income or – loss = ending capital
 CONTENT 3
Profit and Loss Sharing
Agreements
Profit- and Loss-Sharing Agreements

The partnership articles should clearly state the

means of distributing profits and distributing losses.
Items commonly considered (in addition to time
and investment given):

– Bonus allowance
– Salary allowance
– Interest allowance on capital invested
● Based on average, beginning or ending
capital balance
– Sharing of remaining amounts
Bonus and Salary Allowances

Bonus allowances are often based on partnership

profits and may be before or after:
(a) salary allowances and (b) bonus.
If the bonus is after both:
Bonus = b% x (NI – Salary Allow – Bonus)

Salary allowances are generally pre-determined

amounts, provided to partners who manage the
partnership. Salary allowances are not expenses in
the determination of partnership net income.
Interest Allowances and Capital
Interest Allowances are generally based on a
measure of the partner's capital
● Beginning of the year capital balance
● Average* capital balance for the year
Weighted average balance
● Ending* capital balance
Beginning balance – withdrawals + investments

* Periodic drawings are often ignored, although

withdrawals are considered.
Allocating Income
Partners’ allowances for bonus, salary, and interest
are allocated to them, whether or not sufficient
profits exist.

Remaining profits (or deficit) are then split

according to the agreed-upon proportions.

These are general procedures. The partnership

articles provide the specific requirements.
Example: Sharing Profits
Lot and Babel agree to share profits and losses:
• Lot and Babel have $60 and $30 salary allowances,
respectively
• Babel has a bonus of 50% of profits in excess of
$500
• Each have interest allowances of 10% of beginning
capital
- Lot Capital, 1/1 $400
- Babel Capital, 1/1 $350
• Remaining profits or losses are shared Lot 60%,
Babel 40%
• Partnership profits are $660 for the year.
Example: Sharing Profits (cont.)
Total Lot Babel
Net income $660
Salary allowance (90) $60 $30
Bonus allowance (80) 0 80
Interest allowance (75) 40 35
Subtotal $415
Split 60:40 (415) 249 166
Allocated net income $0 $349 $311

Bonus = 50%(660 - 500) = 80

Lot Interest = 10%(400) = 40
Babel Interest = 10%(350) = 35
Allocation: 60%(415) = 249; 40%(415) = 166
Example: Sharing Profits (cont.)
Assume instead that income was only $120.
Total Lot Babel
Net income $120
Salary allowance (90) $60 $30
Bonus allowance 0 0 0
Interest allowance (75) 40 35
Subtotal, deficit ($45)
Split 60:40 45 (27) (18)
Allocated net income $0 $73 $47

Bonus = zero (income does not exceed $500)

Lot Interest = 10%(400) = 40
Babel Interest = 10%(350) = 35
Allocation: 60%(-45) = -27; 40%(-45) = -18
 CONTENT 4
Admitting a New Partner
Admitting a New Partner

Methods of entry for a new partner into an existing

partnership:

1. New partner purchases interest from existing

partner(s).
● Goodwill method
● Bonus method
2. New partner invests directly in partnership.
● Goodwill method
● Bonus method
Buy from Partner: Simple
Alf and Bal have capital balances of $50k each, and
each has a 50% interest in the firm.
Cob buys half of Alf's interest for $25.

Alf Capital 25
Cob Capital 25

blank Before blank blank After blank

blank Capital Share blank Capital Share
Alf $50 50% blank $25 25%
Bal 50 50% blank 50 50%
Cob blank blank blank 25 25%
Total $100 blank blank $100 blank
Buy from Partner: Goodwill

Alf and Bal have capital of $50 and $40, each with
50% interest.
Cob will pay $50 directly to the partners and
receive 50% interest in the firm. Alf and Bal each
keep 25%. Assets are at fair value.

Implied value of firm, $50/.50 100

Old capital, $50 + 40 90
Goodwill 10

The goodwill increases Dawn & Ed's capital by $5

each.
Buy from Partner: Goodwill (continued)

After
Before Revaluation revaluation Transfer Final
Alf $50 $5 $55 ($25) $30
Bal 40 5 45 (25) 20
Cob 50 50
Total $90 $100 $100

Presumably, Cob paid $25 to Alf and $25 to Bal.

If the partners had decided to realign the capital,

the capital of Alf and Bal would be reduced by $30
and $20 respectively to transfer the $50 to Cob.
Buy from Partner: Bonus

If Alf and Bal had decided not to revalue the assets

or record goodwill, the bonus method would be
used.
Before Transfer Final
Alf $50 ($22.5) $27.5
Bal 40 (22.5) 17.5
Cob 45.0 45.0
Total $90 $90.0

Cob's capital is 50%(90) = $45.

Entries for Purchase from Partner
Entries for Fay's admission, under goodwill and
bonus methods:

Goodwill 10 blank
Alf Capital blank 5
Bal Capital blank 5
Alf Capital 25 blank
Bal Capital 25 blank
Cob Capital blank 50
Goodwill method, aligning capital accounts blank blank

Alf Capital 22.5 blank

Bal Capital 22.5 blank
Cob Capital blank 45
Bonus method, not aligning capital accounts blank blank
New Partner Investment: Goodwill to Old
Partners
Dre and Boy each have capital balances of $40 and
share equally in the firm. Cry will be admitted with
an investment of $50 cash.
All three will have equal shares, and net assets are
at fair value. Goodwill will be recorded.

Implied value of firm, $50/(1/3) blank $150

Old capital, $40 + 40 $80 blank
Additional investment 50 130
Goodwill blank $20

Cry: $130*1/3 = $43.3, but he pays $50 … so

goodwill goes to old partners. Implied firm value is
based on Cry's investment.
New Partner Investment: Goodwill to Old Partners
(continued)

After
Before Re-valuation re-valuation Investment Final
Dre $40 $10 $50 blank $50
Boy 40 10 50 blank 50
Cry blank blank blank $50 50
Total $80 blank $100 blank $150

Capital of $80 at the start, increases by the $20

goodwill and the $50 cash investment.
New Partner Investment: Goodwill to New
Partner
Dre and Boy each have capital balances of $40 and share equally
in the firm. Cry will be admitted with an investment of $50 cash.
Cry will be given a 40% share; Dre and Boy will each have 30%,
and net assets are at fair value. Goodwill will be recorded.

Implied value of firm, $80/(.60) $133.3

Old capital, $40 + 40 $80
Additional investment 50 130.0
Goodwill $3.3

Cry: $130*40% = $52, but he pays $50 … so goodwill goes to

new partner. Implied firm value is based on old partners' capital
and retained interest.
New Partner Investment: Goodwill to New
Partner (continued)

After
Before Re-valuation re-valuation Investment Final
Dre $40 $40 $40.0
Boy 40 40 40.0
Cry $3.3 3.3 $50 53.3
Total $80 $83.3 $133.3

Capital of $80 at the start, increases by the

$3.3 goodwill and the $50 cash investment.
New Partner Investment: Bonus
Dre and Boy decide not to revalue the business
assets, and Cry invests $50 cash in the business for
a 1/3 interest.

Before Investment Bonus Final

Dre $40 3,33 $43,33
Boy 40 3,33 43,33
Cry $50 (6,66) 43,33
Total $80 $130

Cry's new capital = 1/3 of the total $130.

Cash 50
Cry capital 43,33
Boy capital 3,33
Dre capital 3,33
Entries for Investment in Business

Entries for Cry's investment, under goodwill and

bonus methods:

Goodwill 20
Dre Capital 10
Boy Capital 10
Cash 60
Cry Capital k 60
Goodwill method, goodwill to old partners

Cash 50
Dre Capital 1
Boy Capital 1
Cry Capital 52
Bonus method, bonus to new partner blank blank
 CONTENT 5
Death or Retirement of a
Partner
Dissociation
Firm value, according to the Uniform Partnership Act, is
the greater of
● Liquidation value
● Sales value as a going concern without the
dissociated partner
Payment to exiting partner may be
● Equal to retiring capital
● More than retiring capital
- Implied goodwill or bonus to retiring partner
● Less than existing capital
- Write down overvalued assets, or bonus to
remaining partners
Payment to Retiring Partner

Ann, Mic, and Jus are partners with capital balances

and profit-sharing percentages, shown respectively, as
follows:
Capital Percentage Profit and
Balances Of Capital Loss Percentage
$70,000 35% 40%
50,000 25 20
80,000 40 40
$200,000 100% 100%

Jus retires, and his partnership interest is paid out by

the partnership.
Payment Equals Partner Capital

Jus Capital 80

Cash 80

The Ann, Mic, and Jus partnership would be

dissolved. Ann and Mic could continue the
partnership, but would need to establish a new
partnership agreement if a partner’s retirement
was not addressed in the original partnership
agreement.
Payment Exceeds Partner Capital

If Jus is paid $92,000 in final settlement of his

partnership interest, the excess may be treated as
1. A bonus to Jus, or
2. Goodwill, in the amount of the excess, or
3. A revaluation of partnership capital based on the
fair value implied by the excess.
Excess Payment: Bonus to Exiting Partner

Jus Capital 80
Ann Capital 8
Mic Capital 4
Cash 92

By treating the excess payment as a bonus to Jus,

Ann and Mic each have their capital accounts
reduced by their relative profit sharing ratios of
40:20 for the total amount of the $12,000 bonus
amount.
Excess Payment: Goodwill Recorded

Jus Capital 80
Goodwill 12
Cash 92

By treating the excess payment as an indication that

partnership assets were undervalued, Goodwill is
recorded. Note that Ann and Mic’s capital accounts
are not revalued.
Excess Payment: Used to Revalue Partnership Capital

Goodwill 30
Ann Capital 12
Mic Capital 6
Jus Capital 12
The excess payment is used to determine the implied fair
value of the partnership.
$12,000 excess / Jus’s 40% share =
implied partnership under-valuation of $30,000

Jus Capital 92
Cash 92
The exiting partner is then paid the amount of his capital
account.
 CONTENT 6
Limited Partnerships
Limited Partnerships

Limited partnerships must have one or more general

partners with unlimited liability for partnership debt.

There may be any number of limited partners.

●Excluded from participating in management
●Limited liability for partnership debt
●Partnership agreement must be in writing, signed
and filed
Questions and Answers