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Brief Contents

VOLUME 1 VOLUME 2

Part 1 The Basic Structure of Accounting Part 3 Accounting for Partnerships and
1 Accounting and the Business Environment 2
Corporate Transactions
2 Recording Business Transactions 56 12 Partnerships 658
3 Measuring Business Income: The Adjusting Process 112 13 Corporations: Share Capital and the Balance Sheet 712
4 Completing the Accounting Cycle 172 14 Corporations: Retained Earnings and the
5 Merchandising Operations 242 Income Statement 762
6 Accounting for Merchandise Inventory 322 15 Long-Term Liabilities 818
7 Accounting Information Systems 370 16 Investments and International Operations 886

Part 2 Accounting for Assets and Liabilities Part 4 Analysis of Accounting Information
8 Internal Control and Cash 430 17 The Cash Flow Statement 946
9 Receivables 492 18 Financial Statement Analysis 1030
10 Property, Plant, and Equipment; and Goodwill and
Intangible Assets 550
11 Current Liabilities and Payroll 602

Appendix A: Indigo Books and Music Inc. 2017 Annual Appendix A: Indigo Books and Music Inc. 2017 Annual
Report A-1 Report A-1
Appendix B: Typical Chart of Accounts for Appendix B: Typical Chart of Accounts for
Service Proprietorships B-1 Corporations B-1

v
 Contents
Part 3 Accounting for
Partnerships and
Corporate Transactions
14 Corporations: Retained Earnings
and the Income Statement 762
Retained Earnings 764

12
Partnerships 658
Characteristics of a Partnership 661
Advantages and Disadvantages of Partnerships 663
Types of Partnerships 664
Partnership Financial Statements 665
Forming a Partnership 666
Sharing Partnership Profits and Losses 667
Partner Withdrawals (Drawings) 673
Admission of a Partner 674
Withdrawal of a Partner from the Business 678
Liquidation of a Partnership 682
Summary Problem for Your Review 686
Summary 688
Assignment Material 691
Extending Your Knowledge 708
Stock Dividends 765
Stock Splits 767
Repurchase of Its Shares by a Corporation 769
The Corporate Income Statement 774
Statement of Retained Earnings 780
Statement of Shareholders’ Equity 780
Restrictions on Retained Earnings 782
Changing Financial Statements 783
Summary Problem for Your Review 788
Summary 790
Assignment Material 793
Extending Your Knowledge 814
15 Long-Term Liabilities 818

Bonds: An Introduction 820

Bonds 822

13
Issuing Bonds to Borrow Money 824
Corporations: Share Capital and
Amortization of a Bond Discount and a Bond Premium 829
the Balance Sheet 712
Adjusting Entries for Interest Expense 836
Corporations 714 Retirement of Bonds 839
Shareholders’ Equity 717 Convertible Bonds and Notes 840
Issuing Shares 720 Advantages and Disadvantages of Issuing Bonds
Organization Costs 726 Versus Shares 841
Accounting for Cash Dividends 727 Mortgages and Other Long-Term Liabilities 842
Different Values of Shares 730 Lease Liabilities 844
Accounting for Business Transactions 730 Summary Problem for Your Review 849
Evaluating Operations 732
Summary 851
Summary Problem for Your Review 735
Assignment Material 855
Summary 737
Extending Your Knowledge 872
Assignment Material 741
Chapter 15 Appendix: Time Value of Money:
Extending Your Knowledge 760 Future Value and Present Value 873

vi
16 Investments and ­International
Operations 886 18 Financial Statement
Analysis 1030
Share Investments 888 Objectives of Financial Statement Analysis 1032
Accounting for Short-Term Investments 890 Methods of Analysis 1033
Long-Term Equity Investments Without Significant Horizontal Analysis 1033
Influence 894 Vertical Analysis 1037
Long-Term Share Investments with Significant Influence 896 Common-Size Statements 1040
Long-Term Share Investments Accounted for by the Using Ratios to Make Decisions 1044
Consolidation Method 898 Limitations of Financial Analysis 1055
Consolidated Financial Statements 899 Investor Decisions 1055
Investments in Bonds 906
Summary Problem for Your Review 1059
Foreign-Currency Transactions 910
Summary 1061
Summary Problem for Your Review 916 
Assignment Material 1065
Summary 918
Extending Your Knowledge 1097
Assignment Material 922
Extending Your Knowledge 941
Appendix A: Indigo Books and Music Inc. 2017 Annual
Report A-1
Appendix B: Typical Chart of Accounts for
Part 4 Analysis of Corporations B-1
Accounting
Glossary G1
Information Index I1

17 The Cash Flow

Statement 946
The Cash Flow Statement: Basic Concepts 949
Purpose of the Cash Flow Statement 950
Format of the Cash Flow Statement 952
Operating, Investing, and Financing Activities 952
Measuring Cash Adequacy: Free Cash Flow 955
The Cash Flow Statement: The Indirect Method 956
Computing Individual Amounts for the Cash Flow
Statement 961
Summary Problem for Your Review 965
Summary 968
Chapter 17 Appendix: The Cash Flow Statement:
The Direct Method 969
Summary Problem For Your Review 983
Assignment Material 987
Extending Your Knowledge 1026

vii
 About the Authors
TRACIE L. MILLER-NOBLES, CPA, received
her bachelor’s and master’s degrees in accounting
from Texas A&M University and is currently pursu-
ing her Ph.D. in adult education also at Texas A&M
University. She is an associate professor at Austin
Community College, Austin, Texas. Previously she
served as a senior lecturer at Texas State University,
San Marcos, Texas, and she has taught as an adjunct at
University of Texas-Austin. Tracie has public account-
ing experience with Deloitte Tax LLP and Sample &
Bailey, CPAs.
Tracie is a recipient of the following awards:
American Accounting Association J. Michael and
Mary Anne Cook prize, Texas Society of CPAs Rising
Star TSCPA Austin Chapter CPA of the Year, TSCPA
Outstanding Accounting Educator, NISOD Teaching
Excellence and Aims Community College Excellence
in Teaching. She is a member of the Teachers of
Accounting at Two Year Colleges, the American
Accounting Association, the American Institute of
Certified Public Accountants, and the Texas State
Society of Certified Public Accountants. She is cur-
rently serving on the board of directors as secretary/
webmaster of Teachers of Accounting at Two Year
Colleges and as a member of the American Institute
of Certified Public Accountants financial literacy
committee. In addition, Tracie served on the
Commission on Accounting Higher Education:
Pathways to a Profession.
Tracie has spoken on such topics as using technol-
ogy in the classroom, motivating non-business majors
to learn accounting, and incorporating active learning
in the classroom at numerous conferences. In her
spare time she enjoys camping and hiking and spend-
ing time with friends and family.
BRENDA L. MATTISON, CMA, has a bachelor’s
degree in education and a master’s degree in account-
ing, both from Clemson University. She is currently
an accounting instructor at Tri-County Technical
College in Pendleton, South Carolina. Brenda previ-
ously served as accounting program coordinator at
TCTC and has prior experience teaching accounting
at Robeson Community College, Lumberton, North
Carolina; University of South Carolina Upstate,
Spartanburg, South Carolina; and Rasmussen
Business College, Eagan, Minnesota. She also has
accounting work experience in retail and manufac-
turing businesses and is a Certified Management
Accountant.
viii
Brenda is a member of the American Accounting
Association, Institute of Management Accountants,
South Carolina Technical Education Association, and
Teachers of Accounting at Two Year Colleges. She is
currently serving on the board of directors as vice-
president of Conference Administration of Teachers
of Accounting at Two Year Colleges.
Brenda previously served as Faculty Fellow at Tri-
County Technical College. She has presented at state,
regional, and national conferences on topics including
active learning, course development, and student
engagement.
In her spare time, Brenda enjoys reading and
spending time with her family. She is also an active
volunteer in the community, serving her church and
other organizations.
ELLA MAE MATSUMURA, PH.D., is a profes-
sor in the Department of Accounting and Information
Systems in the School of Business at the University of
Wisconsin–Madison, and is affiliated with the univer-
sity’s Center for Quick Response Manufacturing. She
received an A.B. in mathematics from the University
of California, Berkeley, and M.Sc. and Ph.D. degrees
from the University of British Columbia. Ella Mae has
won two teaching excellence awards at the University
of Wisconsin–Madison and was elected as a lifetime
fellow of the university’s Teaching Academy, formed
to promote effective teaching. She is a member of
the university team awarded an IBM Total Quality
Management Partnership grant to develop curricu-
lum for total quality management education.
Ella Mae was a co-winner of the 2010 Notable
Contributions to Management Accounting Literature
Award. She has served in numerous leadership posi-
tions in the American Accounting Association (AAA).
She was coeditor of Accounting Horizons and has
chaired and served on numerous AAA committees.
She has been secretary-treasurer and president of the
AAA’s Management Accounting Section. Her past
and current research articles focus on decision mak-
ing, performance evaluation, compensation, supply
chain relationships, and sustainability. She coau-
thored a monograph on customer profitability analy-
sis in credit unions.
About the Canadian Authors
CAROL A. MEISSNER is a professor in
both Business and Management Studies and the
Automotive Business School of Canada at Georgian
College in Barrie, Ontario. She teaches in the
Accounting Diploma, Automotive Business Diploma,
and business degree programs.
Carol has always been a teacher. She started as a
part-time college instructor when she completed her
first degree and has taught full time since 2005. In
2014, Carol was awarded the Georgian College Board
of Governors’ Award of Excellence Academic for out-
standing contributions to the college and an ongoing
commitment to excellence.
Her “real world” experience includes car dealership
controllership and self-employment as a part-time con-
troller and consultant for a wide variety of businesses.
Carol has broad experience in curriculum develop-
ment. She has been a curriculum chair, program coor-
dinator, member of several curriculum committees,
and has been involved in writing and renewing
degree, diploma, and graduate certificate programs.
A self-professed “learning junkie,” Carol holds a
Bachelor of Commerce degree, a Master of Business
Administration degree, a Master of Arts degree in
Education (Community College concentration), and
a CPA designation. She has also earned Georgian
College’s Professional Development Teaching Practice
Credential and is a graduate of Georgian’s Aspiring
Leaders program. She is a regular attendee and occa-
sional presenter at conferences related to teaching,
accounting, and the automotive industry. Outside of
work she is an esports mom who spends many hours
watching tournaments online.
JO-ANN JOHNSTON is an instructor in the
Accounting, Finance and Insurance Department
at the British Columbia Institute of Technology
(BCIT). She obtained her Diploma of Technology in
Financial Management from BCIT, her Bachelor in
Administrative Studies degree from British Columbia
Open University, and her Master of Business
Administration degree from Simon Fraser University.
She is also a certified general accountant, has CPA
designation, and completed the Canadian securities
course.
Prior to entering the field of education, Jo-Ann
worked in public practice and industry for over
10 years. She is a past member of the board of gover-
nors of the Certified General Accountants Association
of British Columbia and has served on various com-
mittees for the association. She was also a member of
the board of directors for the BCIT Faculty and Staff
Association and served as treasurer during that
tenure.
In addition to teaching duties and committee work
for BCIT, Jo-Ann is the financial officer for a family-
owned business.
PETER R. NORWOOD is an instructor in
accounting and coordinator of the Accounting pro-
gram at Langara College in Vancouver. A graduate
of the University of Alberta, he received his Master
of Business Administration from the University of
Western Ontario. He is a CPA, a fellow of the Institute
of Chartered Accountants of British Columbia, a cer-
tified management accountant, and a fellow of the
Society of Management Accountants of Canada.
Before entering the academic community, Peter
worked in public practice and industry for over 15
years. He is a past president of the Institute of Chartered
Accountants of British Columbia and chair of the
Chartered Accountants School of Business (CASB). He
is also the chair of the Chartered Accountants Education
Foundation for the British Columbia Institute of
Chartered Accountants and has been active on many
provincial and national committees, including the
Board of Evaluators of the Canadian Institute of
Chartered Accountants. Peter is also a sessional lecturer
in the Sauder School of Business at the University of
British Columbia.
ix
 Changes to This Edition
General
Revised end-of-chapter starters, exercises, practice
sets, challenge exercises, ethical issues, problems,
challenge problems, decision problems, and financial
statement cases.
Moved IFRS Mini-Cases and Comprehensive
Problems for each Part to MyLab Accounting.
Learning Objectives in all chapters have been
reviewed against current CPA competencies and
correlation provided at the beginning of each
chapter. Many of the problems in the text (Beyond
the Numbers, Ethical issues, Decision Problems,
Financial Statements Cases) give opportunities to
develop CPA competencies, in particular Enabling
Competencies, such as Communication, Problem
Solving, and Professional and Ethical Behaviour.
• NEW! Using Excel. This end-of-chapter exercise
in select chapters introduces students to Excel to
solve common accounting problems as they
would in the business environment.
• NEW! Serial Exercises. Serial exercises in all
chapters expose students to recording entries for
a service company, which grows to become a
merchandiser later in the text.
• NEW! Ethics box. This feature provides common
questions and potential solutions business
owners face. Students are asked to determine the
course of action they would take based on
concepts covered in the chapter and are then
given potential solutions. Available in most
chapters.
• NEW! List of acronyms has been expanded and
added to inside back cover for easier student
reference.
Chapter 12
• Additional starters and exercises.
Chapter 13
NEW! chapter-opening vignette.
• Made examples more continuous so they are
easier to follow (fewer companies in examples).
x
Chapter 14
• Updated corporate information in opening
vignette.
• Split errors and changes into separate learning
objectives so easier for faculty to teach one or
both.
• Additional starters and exercises.
Chapter 15
NEW! chapter-opening vignette.
• Streamlined bonds introduction.
• Schedules now in Excel.
• Improved presentation and consistency in
­mortgage schedules.
Chapter 16
NEW! chapter-opening vignette.
• Additional starters and exercises.
• Removed Joint Ventures – the new S2056 for Joint
Arrangements is too complex for an introductory
course.
• Moved summaries of types of investments to
beginning of the equity sections.
• Separated equity and consolidation information
into different learning objectives so schools that
don’t cover consolidations can omit them easier.
Chapter 17
NEW! chapter-opening vignette.
• Focused chapter on the indirect method for the
cash flow statement and moved the direct method
to an appendix. Easier for schools only covering
one, though all content is still there for those who
cover both methods.
• Additional starters, exercises and problems.
Chapter 18
NEW! chapter-opening vignette.
• Expanded explanations for days sales in i­ nventory
and debt/equity ratio.
• Additional starters and exercises.
Horngren’s Accounting …
Expanding on Proven Success
Accounting Cycle Tutorial
This interactive tutorial in MyLab Accounting
helps students master the Accounting Cycle for
early and continued success in introduction to
accounting courses. The tutorial, accessed by
computer, smartphone, or tablet, provides
students with brief explanations of each concept
of the Accounting Cycle through engaging,
interactive activities. Students are immediately
assessed on their understanding, and their
performance is recorded in the MyLab
gradebook. Whether the Accounting Cycle
Tutorial is used as a remediation self-study tool
or course assignment, students have yet another
resource within MyLab to help them be success-
ful with the accounting cycle.

NEW!
ACT Comprehensive Problem
The Accounting Cycle Tutorial now includes a comprehensive problem that allows students to work with the same
set of transactions throughout the accounting cycle. The comprehensive problem, which can be assigned at the
beginning or the end of the full cycle, reinforces the lessons learned in the Accounting Cycle Tutorial activities by
emphasizing the connections between the accounting cycle concepts.

Study Plan
The Study Plan acts as a tutor, providing personalized recommendations for each of your students based on his
or her ability to master the learning objectives in your course. This allows students to focus their study time by
pinpointing the precise areas they need to review and allowing them to use customized practice and learning
aids–such as videos, eText, tutorials, and more–to get them back on track. Using the report available in the
gradebook, you can then tailor course lectures to prioritize the content where students need the most support–
offering you better insight into classroom and individual performance.

Dynamic Study Modules

New! Chapter-specific Dynamic Study
Modules help students study
­effectively on their own by
­continuously assessing their activity
and performance in real time. Here’s
how it works: students complete a set
of questions with a unique answer
format that also asks them to indicate
their confidence level. Questions
repeat until the student can answer
them all correctly and confidently.
Dynamic Study Modules explain the
concept using materials from the text.
These are available as graded assign-
ments and are accessible on smart-
phones, tablets, and computers.

xi
 Learning Catalytics
Text-specific Learning Catalytics helps you generate
class discussion, customize your lecture, and promote
peer-to-peer learning with real-time analytics. As a
student response tool, Learning Catalytics uses
students’ smartphones, tablets, or laptops to engage
them in more interactive tasks and thinking.

• NEW! Upload a full PowerPoint® deck for easy

creation of slide questions.

• Help your students develop critical thinking skills.

• Monitor responses to find out where your students

are struggling.

• Rely on real-time data to adjust your teaching

strategy.

• Automatically group students for discussion,

teamwork, and peer-to-peer learning.

Pearson Etext
Pearson eText gives students access to their textbook anytime, anywhere. In addition to note-taking, highlighting,
and bookmarking, the Pearson eText offers interactive and sharing features. Instructors can share their comments
or highlights, and students can add their own, creating a tight community of learners within the class.

xii
Textbook Features

Making Connections
CONNECTING CHAPTER boxes appear at the beginning of each chapter. This
feature combines the chapter outline with the learning objectives, key questions, and
page references.

18 Financial Statement
Analysis

CONNECTING CHAPTER 18
LEARNING OBJECTIVES LEARNING OBJECTIVES
provide a roadmap showing
1 Perform a horizontal analysis of financial 4 Compute the standard financial ratios
statements How do we compute standard financial ratios, and what will be covered and what is
How do we compare several years of financial what do they mean?
information?
especially important in each
Using Ratios to Make Decisions, page 1044
Objectives of Financial Statement Analysis, Measuring the Ability to Pay Current Liabilities chapter.
page 1032 (Liquidity)
Methods of Analysis, page 1033 Measuring the Ability to Sell Inventory and Collect
Horizontal Analysis, page 1033 Receivables (Efficiency)
Trend Percentages Measuring the Ability to Pay Long-Term Debt
2 Perform a vertical analysis of financial (Solvency)
statements Measuring Profitability
Analyzing Shares as an Investment (Value)
What is vertical analysis, and how do we perform
Limitations of Financial Analysis, page 1055
PAGE REFERENCES give
one?
Vertical Analysis, page 1037
Investor Decisions, page 1055
Annual Reports
students the ability to quickly
3 Prepare and use common-size financial
statements
Red Flags in Analyzing Financial Statements connect to the topic they are
5 Describe the impact of IFRS on financial
What are common-size financial statements, and statement analysis
seeking within the chapter.
how do we use them?
Common-Size Statements, page 1040
What is the impact of IFRS on financial statement
analysis?
KEY QUESTIONS are questions
Benchmarking
The Impact of IFRS on Financial Statement about the important concepts in
Analysis, page 1058
the chapter, expressed in
The Summary for Chapter 18 appears on page 1061. everyday language.
Key Terms with definitions for this chapter’s material appears on page 1063.

CPA competencies CPA COMPETENCY MAP Each

This text covers material outlined in Section 1: Financial Reporting of the CPA Competency Map. The Learning Objectives for each chapter’s Learning Objectives
chapter have been aligned with the CPA Competency Map to ensure the best coverage possible.
1.1.2 Evaluates the appropriateness of the basis of financial reporting
have been aligned with the
1.4.4 Interprets financial reporting results for stakeholders (internal or external) latest CPA competencies, which
are provided here.
1030

M18_MILL0107_11_SE_C18.indd 1030 31/01/19 5:44 PM

xiii
 CHAPTER OPENERS
Sometimes the formula for straight-line amortization is restated to show the useful

Susan Schmitz/Shutterstock
Chapter openers set up the concepts
life as ato be or percentage, known as the amortization rate. For example, if an asset
rate
covered in the chapter using stories students
has a five-year useful life, then or 20 percent is amortized each year. The formula
can relate to. The implications for
of those
the expense can then be restated as follows:
concepts on a company’s reporting and
W
hen Danielle Rodriguez started her business in January 2015, she wasn’t
thinking about accounting. As an IT professional, she was looking to com-
decision-making processes are then discussed. 1 and
Straight@line amortization = (Cost − Residual value) :
bine her business skills with her love of dogs. Her “fur babies,” Zoey
Maggie Mae, are an important part of her #Barknfun Team.
Useful life
Her business, The Bark’N Fun Company, is a monthly subscription box service
in years
that offers premium toys, treats, and accessories for dogs and puppies. The busi-
= Amortizable cost
ness is online, but her office :in Amortization
is located rate
the small town of Courtice, Ontario.
The majority of small businesses fail within the first three years. So how has The
Bark’N Fun Company stayed in business in a competitive online market for luxury

A unit of output
can be a kilometre
driven/flown, hours,
Units-of-Production Method items? Danielle, The Bark’N Fun Company’s owner, uses accounting information to
make her business decisions. Is she an accountant? No! She is a smart business-
person who knows that she needs to understand the business’s monthly revenues
The units-of-production (UOP) method allocates
and expenses so that her business canasurvive
fixed amount
in the short-term ofin amortization
and thrive the
long-term. The Bark’N Fun Company needs to know if the prices of their toys and
to each unit of output produced by
treats the
are highasset. Think
enough to cover operatingof thisor as
expenses, if theya
cantwo-step
afford to offer process:
free shipping. Is it working? Yes. The Bark’N Fun Company has not only been able

❶Calculate amortization cost per unit.

to stay in business but also supports charities that are important to dogs, such as

or a part manufactured. canine rescue organizations and humane society shelters.

❷Multiply the cost per unit by the number of units produced or used in the period.
This chapter shows how The Bark’N Fun Company and other businesses record
their transactions and update their financial records. The procedures outlined in
this chapter are followed by businesses ranging in size from giant multinational
The equation to calculate thecorporations
UOPlikemethod PetSmart Inc. toamortization expense,
micro-enterprises like The Bark’N Fun Company applied to
and Hunter Environmental Consulting, who we will continue to follow through this
the Exhibit 10–4 data, is: chapter.

❶ Units@of@production
Cost − Residual value
amortization per unit =
Useful life in units of production
of output
$65,000 − $5,000 57
=
400,000 kilometres
M02_MILL5337_11_SE_C02.indd 57
= $0.15 per kilometre 02/01/19 6:15 PM

SPREADSHEET FORMATS USED IN EXHIBITS

This truck was driven 90,000 kilometres in the first year, 120,000 in the second,
NEW! Excel-based financial documents
100,000 inare
theused so60,000
third, students willfourth,
in the familiarize
and themselves with
30,000 in the theThe
fifth. accounting
amount of UOP
information used in the business world.
amortization per period varies with the number of units the asset produces. Exhibit
10–6 shows the UOP amortization schedule for this asset.
EXHIBIT 10–6 | Units-of-Production Amortization for a Truck

A B C D E F G H I
1 Amortization for the Year
2 Asset Amortization Number of Amortization Accumulated Asset
3 Date Cost Per Kilometre Kilometres Expense Amortization Book Value
4 Jan. 1, 2020 $65,000 ❶ ❷ $65,000
5 Dec. 31, 2020 $0.15 × 90,000 = $13,500 $13,500 51,500
6 Dec. 31, 2021 0.15 × 120,000 = 18,000 31,500 33,500
7 Dec. 31, 2022 0.15 × 100,000 = 15,000 46,500 18,500
8 Dec. 31, 2023 0.15 × 60,000 = 9,000 55,500 9,500
9 Dec. 31, 2024 0.15 × 30,000 = 4,500 60,000 5,000

xiv
To do the calculation in one
step, compute 2 ÷ Useful life
Residual value
Double-Declining-Balance Method
The double-declining-balance (DDB) method computes annual amortization
expense by multiplying the asset’s book value by a constant percentage, which is
two times (double) the straight-line amortization rate. This is an accelerated amorti-
zation model, which means it expenses more of the cost of the asset at the start of
its life and less at the end of its useful life.
There are two steps to calculate the amortization expense:
❶Compute the straight-line amortization rate per year, for example, for the truck:
 Journal Entry: Record the transaction in the journal, as explained in Exhibit 2–8.
Total debits must always equal total credits. This step is also called
Transaction
making the journal entry 1
or journalizing the transaction.Transaction 2 added to results of Transaction 1
Received $250,000 cash that the Paid $100,000 cash to
EXHIBIT 2–8 | The Journalowner invested in the business purchaseANNOTATED
land
EXHIBITS More
EXHIBIT
DEBITS 2–12
Think about this for a moment. 5 | CREDITS
Trial Balance DEBITS 5 CREDITS
Date of the transaction
Debit account name and dollar amount. annotated exhibits have
Why is an Note:
increase to an Debits are always listed first. been developed for this
expense a debit? Because the HUNTER ENVIRONMENTAL CONSULTING Cash
Do not confuse the trial edition to improve
d expenses Lisa Hunter, Unadjusted Trial Balance $150,000 Lisa Hunter,
overall effect
balance withof the
an increase
balance CashJournal Capital Page 1 clarity and reduce
Capital
discussed $250,000 April 30, 2019
insheet.
an expense
A trialis balance
a decrease to
is an $250,000 $250,000
goods and Date Account TitlesAccount and Explanation Debit CreditLand related explanations in
equity by reducing net
internal document seen only income
ing assets Number Account Title $100,000 the
Debit text. Credit
or creating a net loss. A loss
e, we must by2019
the company’s owners,
reduces the capital balance. To 1100 Cash $172,000
2–6 shows managers, and accountants.
Apr.a2capital Cash the 250,000
reduce balance, 1200 Accounts receivable 10,000
r’s equity. The trial balance is merely
account is debited. Lisa Hunter, Capital1400 250,000
a step in the preparation of Office supplies 7,000
ReceivedThe
the financial statements. initial investment from owner.
Expanding the Rules of Debit and Credit:
1900 Land Think about th 100,000
balance sheet, on the other Why is an
hand, isBrief
a financial statement
Revenues 2100 and Accounts Expenses payable $ 2,000
explanation Credit account name and dollar amount. expense a deb
Dollar signs are omitted in the money columns because it is
The creditOwner’s 3000
account name equity Lisa
is indented. includes Hunter, capital
revenues
understood andareexpenses
that the amounts in dollars. because revenues and 250,000 expenses
used by other internal and overall effec
external users. make up net
3100 income or
Lisa net
Hunter, loss, which
withdrawals flows into owner’s
in an expense
equity.
6,000As we discussed
Regardless of the accounting in Chapter 40001, revenues
system arerevenue
Service
in use—computerized increases in orowner’s
manual—an equity from providing goods
equity by redu
and
55,000
services to throughout
customers.RentExpenses are decreases in notes
owner’s equity from usingof
assets
INSTRUCTOR
accountant mustTIPS & TRICKS
analyze every Found
business
5100 transaction theintext, these
the manner
expense
handwritten
we are present- mimic the experience
4,000
having
or creating a
me an experienced
ing teacher
in these opening walkoraincreasing
chapters. student
Accounting liabilities
through inperforms
concepts
software theon
course
the of operating
“board.”
the same Many the
actions business.
include
as Therefore,
mnemonic weormust
devices
5200 Salaries expense 6,500 reduces the ca
oss) examples to help
accountants do instudents
a manual expand
system.the
remember theaccounting
For equation
a sales as
rules of accounting.
example, when weswipes
clerk did inyour
Exhibit 1–10. Exhibit 2–6 shows reduce a cap
revenues5300
and expensesUtilities expense
under equityrecords
because they 1,500
VISA card through the credit card reader, the accounting system both thedirectly affect owner’s equity. account
store’s sales revenue and the receivable from Total VISA. The software automatically $307,000 $307,000
One way tothe
records memorize this is to as EXHIBIT
transaction a journal 2–6 |but
entry, Expanded
an Accounting
accountant had to Equation
program the
Expenses
use an acronym,
computer to dosuchso.as AWE
A computer’s • Search
abilitythe journal routine
to perform for the tasks
amount andofmathemati-
the difference. For example, suppose the
Dr Cr ROL.
cal In this case, the
operations (A)sset, and without
quickly totalerror
credits
frees onaccountants
Hunter Environmental
for decision Consulting’s trial balance equal $307,000
making.
1 2
(W)ithdrawal, and (E)xpense and total
Assets 5 debitsLiabilitiesequal
1 $306,000. A $1,000 Owner’s transactionEquity may have been posted
accounts all have debit balances, Dr incorrectly
Cr to the
Dr Cr ledger by omitting the debit entry.
(Owner, Capital account)Search the journal for a
ETHICS
while the (R)evenue, (O)wner’s Are receipts
Equity, and (L)iability accounts
1 $1,0002
really important?
transaction
2 1 and check its posting to the ledger.

• Divide the difference between total debits and total credits by 2. A debit treated as
all haveMorris,
credit balances.
Elijah assistant manager for Red’s
a credit, or viceBig versa,
BurgerdoublesSolution
the amount of error. Suppose the accountant paid
or credit— OrRestaurant,
memorize which side has
is responsible for purchasing equipment and Hannah Investments Owner, Net Income
lly have a the “+” (increase), and then
$1,000 cash for the utilities expenses.
(Owner, This2transaction
should
Capital) notWithdrawals
reimburse wasElijah
recorded
1 until
(or correctly
she
– Net in the
receives
Loss)
supplies for the restaurant. Elijah recently purchased a the receipt—the source document. Elijah could have
ersely, lia- all $4,000
the “−” (decreases) are the
journal but was posted as a debit to Cash and a debit to Utilities Expense. Thus,
commercial-grade refrigerator for the restau- purchased Dr Cr Dr Cr
$2,000 appears on the debit side of the thetrial
refrigerator
balance, 2for
andless thanisthe
there amount
nothing onhe the
al balances opposite.
rant, but Thisheway you only
can’t find the receipt. Elijah purchased the is2asking 1 1
credit in reimbursement. Source documents provide
ghlighting have refrigerator
to memorize half with personal funds
of them! andside relating
is asking totobethis the
transaction. The out-of-balance amount is $2,000, and
evidencetransaction
of the amount One way to m
reimbursed
Try DR. AWE—the by debits
the restaurant. Hannah, dividingthe by 2restaurant’s
reveals that the relevant mayofhavethe transaction.
had
Revenues a value If either
of
2 Expenses$1,000.
an auditor or the owner of the restaurant investigated use an acrony
ve a credit accountant,
(dr) belong with the has said that she isSearch
(A)sset, unsure theif journal
the businessfor a $1,000 transaction and check the posting to the ledger.
the $4,000 purchase, he or she would Dr Cr need toDrsee Cr the ROL. In this c
Cash will can reimburse
(W)ithdrawal, Elijah without• a Divide
and (E)xpense receipt.the Elijah suggests: source
out-of-balance amountdocument
by 9. If the toresult
verifyistheevenly 1divisible1
2transaction. IfbyElijah
9,2 the
(W)ithdrawa
he liability “Hannah, it won’t really matter error
accounts. if I havemaya receipt
be a slide,or not.which is adding
truly cannotor deleting
find one orHannah
the receipt, several zeros
shouldinask a figure
for accounts all ha
You’ve seen the refrigerator in the restaurant, so you an alternative source document such as a credit card or
(e.g., writing $61 as $610), or a transposition (e.g., treating $61 as $16). Suppose
know I purchased it. What difference is a little receipt bank statement that shows evidence of the purchase. In while the (R)e
going to make?”
the accountant listed the $6,000 balance in Lisa Hunter, Withdrawals as $60,000 on
TRY IT! BOXES Found after eachthe learning objective, slide-type Equity, and (L
apter 2 Recording BusinessWhat Transactions
should Hannah 63Normal
do? What
trial balance—a
Balance
would you of Try
do? anIt!Account
boxes
addition,
funds
give
error.
to
students
Elijah
Total
purchase
debitsopportunities
should be warned
would
equipment
to
about
differ fromapply
for throughout
theby
using
total
business.
the concept
personal
credits by
all have cr
they’ve just learned by completing an accounting
$54,000 (i.e., $60,000 problem. Links =
- $6,000 to $54,000).
these exercises
Dividing appear
$54,000 the $6,000,
9 yields eText,
allowing students to practise in MyLab An account’s normal
Accounting balance appears on the side of the account—debit or credit— Or memorize
the correct amountwithout interruption. Trace this amount through the ledger until
of the withdrawals.
whereyou increases are recorded. For example, Cash and other
reach the Lisa Hunter, Withdrawals account with a balance of $6,000. Dividing assets usually have a the “+” (incr
debit by balance,
9 can giveso thethenormal balance of amount
correct transaction assets isfor
Chapter ona2the debit
Recording
slide side.
but not forConversely,
Business Transactions
a transposition. lia- 65all the “−” (de
bilities and owner’s equity usually have a credit balance, so their normal balances opposite. Th

Try It!
02/01/19 6:15 PM
are on the credit side. Exhibit 2–7 illustrates the normal balances by highlighting have to memo
the side where the balance is increased. Try DR. AW
An account that normally has a debit balance may occasionally have a credit (dr) belong w
8. Using 65 the following accounts and their balances, prepare the unadjusted trial balance for Cooper
M02_MILL5337_11_SE_C02.indd balance, which indicates a negative amount of the item. For example, Cash will 02/01/19(W)ithdrawa 6:15 PM
Furniture Repair as of December 31, 2018. All accounts have normal balances.
have a credit balance if the entity overdraws its bank account. Similarly, the liability acc
Cash ........................................... $ 7,000 Advertising Expense...................... $ 1,200
Unearned Revenue.................. 4,500 Utilities Expense ............................. 800
Equipment ................................ 10,000 Rent Expense................................... 5,000
Service Revenue ...................... 8,000 Accounts Payable ........................... 2,300 Chapter 2 Recording Business
M. Cooper, Capital .................. 12,200 M. Cooper, Withdrawals ............... 3,000
Solutions appear at the end of this chapter and on MyLab Accounting

M02_MILL5337_11_SE_C02.indd 63
78 Part 1 The Basic Structure of Accounting xv
 Determine whether each account is increased or decreased by the with a chart as the last learning objective for a chapter. Some chapters
transaction. won’t have a chart, because in many cases the standards are the same! In
Use the rules of debit and credit to determine whether to debit or
credit the account to record its increase or decrease. Volume 2, these charts will become more detailed.
Accounting Verify that the increases and decreases result in an accounting equa-
Equation: tion that is still in balance.
IFRS/ASPE COMPARISON | How
Journal Entry: Record the transaction in the journal,EXHIBIT
as explained1–16
in Exhibit 2–8. IFRS Differ from What We See in the Chapter
Provides guidance onmust
Total debits how IFRS
always equal total credits. This step is also called
differs fromLO making the journal entry or journalizing the transaction.
ASPE.6 ASPE IFRS
| The are
EXHIBIT 2–8 What Journal
IFRS and ASPE?
In Canada, both International Financial Reporting Standards (IFRS) and Accounting
Debit account name and dollar amount.
Date of the transaction
Debits are always listed first. Standards for Private Enterprises (ASPE) are prepared under the authority of the
Accounting Standards Board and are published as part of the CPA Canada Handbook.
Journal Page 1
Sole proprietorships follow ASPE, which Publicly accountable enterprises or those
Date Account Titles and Explanation Debit Credit
are simpler and less costly to implement. planning to become one must follow IFRS.
2019
Apr. 2 Cash
Private corporations can choose to follow
250,000
ASPE or IFRS.
Lisa Hunter, Capital 250,000
Received initial investment from owner. Financial reports contain less information Financial reports under IFRS contain more
under ASPE because readers have more detailed information than under ASPE
Credit account name and dollar amount. Dollar signs are omitted in the money columns because it is
Brief explanation
The credit account name is indented. access
understood that the amountstoarethe details themselves.
in dollars. because users do not have easy access to
the information.
Regardless of the accounting system in use—computerized or manual—an
accountant must analyze every business transaction in the Companies
manner we arereporting
present- under either method must also provide notes to the financial
ing in these opening chapters. Accounting software performs the same actions
statements, whichasinclude significant accounting policies and explanatory information.
accountants do in a manual system. For example, when a sales clerk swipes your
VISA card through the credit card reader, the accounting system records both the
store’s sales revenue and the receivable from VISA. The software automatically
24transaction
records the Partas1aThe
journal entry,
Basic but an accountant
Structure had to program the
of Accounting
computer to do so. A computer’s ability to perform routine tasks and mathemati-
cal operations quickly and without error frees accountants for decision making.

ETHICS Are receipts really important? ETHICS BOXES This feature

M01_MILL5337_11_SE_C01.indd 24 for Red’s Big Burger
Elijah Morris, assistant manager
Restaurant, is responsible for purchasing equipment and
supplies for the restaurant. Elijah recently purchased a
$4,000 commercial-grade refrigerator for the restau-
rant, but he can’t find the receipt. Elijah purchased the
refrigerator with personal funds and is asking to be
reimbursed by the restaurant. Hannah, the restaurant’s
accountant, has said that she is unsure if the business
can reimburse Elijah without a receipt. Elijah suggests:
“Hannah, it won’t really matter if I have a receipt or not.
You’ve seen the refrigerator in the restaurant, so you
know I purchased it. What difference is a little receipt
going to make?”
What should Hannah do? What would you do?
Solution provides common questions and02/01/19 6:15 PM
Hannah should not reimburse Elijah until she receives potential solutions business
the receipt—the source document. Elijah could have
purchased the refrigerator for less than the amount he owners face. Students are asked to
is asking in reimbursement. Source documents provide
the evidence of the amount of the transaction. If either
determine the course of action
an auditor or the owner of the restaurant investigated they would take based on concepts
the $4,000 purchase, he or she would need to see the
source document to verify the transaction. If Elijah covered in the chapter and are
truly cannot find the receipt, Hannah should ask for
an alternative source document such as a credit card or
then given potential solutions.
bank statement that shows evidence of the purchase. In
addition, Elijah should be warned about using personal
funds to purchase equipment for the business.

Chapter 2 Recording Business Transactions 65

NEW!
M02_MILL5337_11_SE_C02.indd 65 02/01/19 6:15 PM

USING EXCEL This end-of-chapter exercise in select chapters introduces students to Excel to
solve common accounting problems as they would in the business environment. Students will work from a
template that will aid them in solving the problem related to accounting concepts taught in the chapter.

NEW!
SERIAL EXERCISE starts in Chapter 1 and run through Volume 1, exposing students to recording
entries for a service company and then moving into recording transactions for a merchandiser later in the text.

NEW!
PRACTICE SET The Practice Set for Chapters 2–9 provide another opportunity for students to practise
the entire accounting cycle. The practice set uses the same company in each chapter, but is often not as extensive
as the serial exercise.

xvi
Acknowledgments for Horngren’s
Accounting, Eleventh Canadian Edition
Acknowledgements for Horngren’s Accounting,
Eleventh Canadian Edition
Horngren’s Accounting, Eleventh Canadian Edition, is the product of a rigorous
research process that included multiple reviews in the various stages of develop-
ment to ensure the revision meets the needs of Canadian students and instructors.
The extensive feedback from the following reviewers helped shape this edition
into a clearer, more readable and streamlined textbook in both the chapter content
and assignment material:
• Gregory Springate, Red Deer College
• Deirdre Fitzpatrick, George Brown College
• Joan Baines, Red River College
• Robert Cinapri, Humber College
• Arsineh Garabedian, Douglas College
• Darlene Lowe, MacEwan University
• Jerry Aubin, Algonquin College
• Meredith Delaney, Seneca College
• Heather Cornish, Northern Alberta Institute of Technology
• Cheryl Wilson, Durham College
We would also like to thank the late Charles Horngren and Tom Harrison for
their support in writing the original material.
We would like to give special thanks to Chris Deresh, CPA, Manager, Curriculum
Content, at Chartered Professional Accountants of Canada for his guidance and
technical support. His willingness to review and discuss portions of the ­manuscript
was generous and insightful, and it is gratefully acknowledged.
The Chartered Professional Accountants, as the official administrator of gener-
ally accepted accounting principles in Canada, and the CPA Canada Handbook, are
vital to the conduct of business and accounting in Canada. We have made every
effort to incorporate the most current Handbook recommendations in this new
edition of Accounting. We would also like to thank Sarah Magdalinski, Northern
Alberta Institute of Technology, for her work in assessing and adapting this
­edition’s Serial Exercises.
Thanks are extended to Indigo Books & Music Inc. and TELUS Corporation for
permission to use portions of their annual reports in Volumes I and II of this text
and on MyLabAccounting. We acknowledge the support provided by the websites
of various news organizations and by the annual reports of a large number of
public companies.
We would like to acknowledge the people of Pearson Canada, in particular
senior portfolio manager Keara Emmett and marketing manager Darcey Pepper.
Special thanks to Suzanne Simpson Millar, Queen Bee at Simpson Editorial
Services, who was an awesome content developer on this edition. Thanks also
to Sarah Gallagher, project manager; Nicole Mellow and Sogut Gulec, content
­managers, for their diligence in keeping everything on track.
Our task is to provide educational material in the area of accounting to ­instructors
and students to aid in the understanding of this subject area. We ­welcome your
suggestions and comments on how to serve you better.

xvii
12 Partnerships

CONNECTING CHAPTER 12
LEARNING OBJECTIVES
1 Identify the characteristics of a partnership Sharing Based on Capital Investments and on Service
What are the characteristics of a partnership? Sharing Based on Service and Interest
Characteristics of a Partnership, page 661 Allocation of a Net Loss
The Written Partnership Agreement Partner Withdrawals (Drawings), page 673
Limited Life 4 Account for the admission of a new partner
Mutual Agency
How do we account for a new partner?
Unlimited Liability
Co-ownership of Property Admission of a Partner, page 674
No Partnership Income Tax Admission by Purchasing a Partner’s Interest
Advantages and Disadvantages of Admission by Investing in the Partnership
­Partnerships, page 663 5 Account for the withdrawal of a partner
Type of Partnerships, page 664
General Partnerships How do we account for the withdrawal of a
Limited Partnerships partner?
Partnership Financial Statements, page 665 Withdrawal of a Partner from the Business,
page 678
2 Account for partners’ initial investments in a Withdrawal at Book Value
partnership Withdrawal at Less than Book Value
How do we account for partners’ investments in a Withdrawal at More than Book Value
partnership? Death of a Partner
Forming a Partnership, page 666 6 Account for the liquidation of a partnership
3 Allocate profits and losses to the partners by How do we account for the ending of a
­different methods partnership?
How can we allocate profits and losses to the Liquidation of a Partnership, page 682
partners? Sale of Assets at a Gain
Sharing Partnership Profits and Losses, page 667 Sale of Assets at a Loss
Sharing Based on a Stated Fraction Capital Deficiencies
Sharing Based on Capital Investments

The Summary for Chapter 12 appears on page 688.

Key Terms with definitions for this chapter’s material appears on page 689.

CPA competencies
This text covers material outlined in Section 1: Financial Reporting of the CPA Competency Map. The Learning Objectives for each
chapter have been aligned with the CPA Competency Map to ensure the best coverage possible.

1.3.1 Prepares financial statements

658
 Mylitleye/Fotolia
J
enny Lo and Sam Lachlan are considering opening a miniature golf course in
Wasaga Beach, Ontario. The golf course will have 18 holes with dinosaurs, wind-
mills, water features, and more. Jenny has been carefully evaluating the tourism
industry in the town and believes that the golf course will be busy enough during
the summer tourist season to close during the winter months, allowing Jenny and
Sam plenty of time to ski and snowboard in the off season.
Jenny and Sam are considering organizing the business as a partnership. Jenny
is willing to contribute a piece of property in the prime downtown area that she
just inherited. She is also interested in managing the day-to-day operations of the
business. Sam, with his degree in accounting, has agreed to handle the accounting
and business aspects of the golf course.
Now all Jenny and Sam need to decide is how the partnership will be organized.
Some questions they are considering include, What are the specific responsibilities
of each partner? How should profits and losses be shared between the partners?
What if one of the partners wants out of the partnership in the future? How would
the partnership add a new partner?

659
 A partnership is an association of two or more persons who co-own a business for
profit. This definition is common to the various provincial partnership acts, which
tend to prescribe similar rules with respect to the organization and operation of
partnerships in their jurisdictions.
Forming a partnership is easy. It requires no permission from government
authorities and involves no legal procedures, with the exception that most prov-
inces require partnerships to register information such as the names of the partners
and the name under which the business will be conducted.1 When two people
decide to go into business together, a partnership is automatically formed.
A partnership combines the assets, talents, and experience of the partners. Busi-
ness opportunities closed to an individual may open up to a partnership. As the
chapter-opening story illustrates, this is an important characteristic of a partner-
ship. The miniature golf course will likely be successful because it is able to com-
bine the skills of its two owners. It is unlikely that Jenny or Sam would be able to
operate the business as well if either tried to do it on his or her own.
Partnerships come in all sizes. Many partnerships have fewer than 10 ­partners.
Some medical practices may have 10 or more partners, while some of the largest
law firms in Canada have more than 500 partners. The largest accounting firm
in Canada has more than 800 partners. Exhibit 12–1 lists the 10 largest public
­accounting firms in Canada. The majority of them are partnerships.

EXHIBIT 12–1 | The 10 Largest Accounting Firms in Canada (by Number of

Partners in 2015)

Deloitte LLP
886
(Toronto)
KPMG LLP
669
(Toronto)
PwC
533
(Toronto)
BDO Canada LLP
442
(Toronto)
MNP LLP
412
(Calgary)
Grant Thornton Canada**
378
(Toronto)
Ernst & Young LLP
356
(Toronto)
Collins Barrow
238
(Toronto)
Mallette
75
(Québec)
Richter
61
(Montreal)

Source: Data from Statista, Top 20 accounting firms in the United States in 2018, by U.S. revenue
(in billion U.S. dollars), Retrieved from https://www.statista.com/statistics/478912/number-of-
partners-at-leading-accounting-firms-canada/

1
 Smyth, J.E., D.A. Soberman, A.J. Easson, and S.S. McGill, The Law and Business Administration in Canada,
13th ed. (Toronto: Pearson Canada Inc., 2013), 598–602.

660 Part 3 Accounting for Partnerships and Corporate Transactions

Why It’s Done This Way
Beginning with this chapter, you will learn more about the different types of organization struc-
tures that were first introduced in Chapter 1. So far, we have only really looked at accounting for
proprietorships.
The good news is that the principles and concepts in the accounting framework you have learned
apply equally to all types of organizations.

Characteristics of a Partnership
Starting a partnership is voluntary. A person cannot be forced to join a partnership, LO 1
and partners cannot be forced to accept another person as a partner (unless existing What are the
partners vote and the majority accept the new partner). The following characteris- ­characteristics of a
tics distinguish partnerships from proprietorships and from corporations. partnership?

The Written Partnership Agreement

A business partnership is somewhat like a marriage. To be successful, the p
­ artners
must cooperate. However, business partners do not vow to remain together for life.
To make certain that each partner fully understands how the partnership ­operates, A partnership is not
partners should draw up a partnership agreement. Although the partnership required to have a formal
agreement may be oral, a written agreement between the partners reduces the written agreement. But a
chance of a misunderstanding. This agreement is a contract between the partners, ­written agreement prevents
so transactions under the agreement are governed by contract law. The provin- ­confusion as to the sharing of
cial legislatures in Canada have passed their respective versions of a partnership profits and losses, partners’
act, the terms of which apply in the absence of a partnership agreement or in the responsibilities, admission
absence of particular matters in the partnership agreement.2 of new partners, how the
The partnership agreement should specify the following points: ­partnership will be liquidated,
and so on. However, there
• Name, location, and nature of the business
can still be disagreements
• Name, capital investment, and duties of each partner even when there is a written
• Procedures for admitting a new partner agreement.
• Method of sharing profits and losses among the partners
• Withdrawals of assets allowed to the partners
• Procedures for settling disputes among the partners
• Procedures for settling with a partner who withdraws from the firm
• Procedures for removing a partner who will not withdraw or retire from the
partnership voluntarily
• Procedures for liquidating the partnership—selling the assets, paying the liabili-
ties, and giving any remaining cash to the partners

Limited Life
A partnership has a limited life. If one partner withdraws from the business or dies,
the partnership dissolves and its books are closed. If the remaining partners want
to continue as partners in the same business, they form a new partnership with a
new set of financial records and a new partnership agreement. Dissolution is the
ending of a partnership and does not require liquidation; that is, the assets need

2
Ibid., 598–618.

Chapter 12 Partnerships 661

 not be sold to outside parties for a new partnership to be created. Often the new
partnership continues the former partnership’s business, and the new partnership
may choose to continue to use the dissolved partnership’s name. Some types of
large partnerships, such as Deloitte LLP, retain the firm name even after partners
resign from the firm.

Mutual Agency
Mutual agency means that every partner is a mutual agent of the firm. Any
partner can bind the business to a contract within the scope of the partnership’s
regular business operations. If a partner enters into a contract with a person or
another business to provide a service, then the firm—not just the partner who
signed the contract—is bound to provide that service. If the partner signs a con-
tract to buy her own car, however, the partnership is not liable because the car is
a personal matter; it is not within the scope of the regular business operations of
the partnership.
The following example shows the impact mutual agency can have on a partner-
ship. Richard Harding and Simon Davis formed a partnership to deal in lumber and
other building materials. The partners agreed that their company should not handle
brick or any stone materials and that neither partner had the right to purchase these
commodities. While Harding was away during the summer, Davis purchased a
quantity of these materials for the company because he could buy them at a cheap
price. Two months later, when Harding returned, business was very slow, and brick
and stone were selling at a price lower than Davis had paid for them. Harding,
therefore, refused to accept any more deliveries under the contract. Harding argued
that Davis had no authority to buy these goods since the partnership was not orga-
nized to deal in brick and stone. The supplier of the brick and stone said that he
did not know the partnership was not in the brick and stone business. In fact, he
believed that it did handle these goods since all of the other lumber companies in
the area bought or sold brick and stone. Because the supplier acted in good faith,
he claimed that Harding and Davis should accept the remaining deliveries of brick
and stone according to the agreement that was made. Who is correct? Under normal
circumstances, the brick and stone supplier is correct because the mutual agency
characteristic of a partnership allows partners to bind each other in business con-
tracts. The agreements made within the partnership would not be known by an
outside party like the supplier, so the supplier would have a solid case and could
sue the partnership to abide by the contract.3

Unlimited Liability
Chapter 1 introduced Each partner has unlimited personal liability for the debts of the business. When
these concepts for a sole a partnership cannot pay its debts with business assets, the partners must pay with
­proprietorship. You may their personal assets. (There are exceptions, which are described in the section,
want to go back and review Types of Partnerships.) If either partner is unable to pay his or her part of the debt,
them now. the other partner (or partners) must make payment.
Unlimited liability and mutual agency are closely related. A dishonest partner
or a partner with poor judgment may commit the partnership to a contract under
which the business loses money. In turn, creditors may force all the partners to pay
the debt from their personal assets. Hence, a business partner should be chosen
with great care.

3
 This case is based on the scenario described at ChestofBooks.com, “B. Apparent Scope of ­Authority,”
http://chestofbooks.com/business/law/Case-Method/B-Apparent-Scope-Of-Authority.
html#ixzz1qimHxY2o, accessed July 1, 2018.

662 Part 3 Accounting for Partnerships and Corporate Transactions

Co-ownership of Property
Any asset—cash, inventory, machinery, computers, and so on—that a partner
invests into the partnership becomes the joint property of all the partners. The
partner who invested the asset is no longer its sole owner.
There is a way for a partner to allow the partnership to use a personal asset, such
as a car or money, without losing his or her claim to that asset: The partner could
lease the car to the partnership. If the partnership ended, the car would have to be
returned to its owner. The partner could also lend money to the partnership instead
of investing it. The partnership would have to repay the loan to the lending partner
before any distribution of capital to the partners.

No Partnership Income Tax

The partnership reports its income to the government tax authority (the Canada
Revenue Agency), but the partnership pays no income tax. The net income of the
partnership is divided and flows through the business to the partners, who pay
personal income tax on their share.
For example, suppose that the Willis & Jones partnership earned net income
of $150,000, shared equally by the two partners. The partnership would pay no
income tax as a business entity. However, each partner would pay income tax as an
individual on his or her $75,000 share of partnership income.

ETHICS Should Erik buy the new equipment?

Erik Morales was very angry with his brother. He had
just come from a partnership meeting concerning the
purchase of new equipment for their recording studio.
His brother, Juan, disagreed about purchasing the new
equipment, stating that the business didn’t have enough
cash to purchase the equipment without incurring addi-
tional debt. After thinking about their conversation,
Erik decided that he would secure a loan to purchase
the equipment. Erik knew that if his brother could just
see how well the new equipment worked, Juan would
change his mind. Should Erik buy the new equipment?
What would you do?
Solution
Mutual agency allows Erik to act as an agent of the part-
nership and secure debt for the purchase of new equip-
ment. However, the fact that his partner, Juan, does not
agree with incurring additional debt should discourage
Erik from taking out the loan. Erik should consider that
the partnership’s debt becomes a personal liability not
only to Erik, but also to Juan. If the partnership can’t repay
the debt, then Erik and Juan must use personal assets to
meet the debt. Erik could not only endanger the liquidity
of the partnership by taking out a loan, but also risk his
relationship with his brother. Erik should not go behind his
brother’s back to purchase the equipment, even though
he thinks it will be a good decision in the long run.

Advantages and Disadvantages

of Partnerships
Exhibit 12–2 lists the advantages and disadvantages of partnerships (compared
with proprietorships and corporations). Most features of a proprietorship also
apply to a partnership, most importantly:
• Limited life
• Unlimited liability
• No business income tax

Chapter 12 Partnerships 663

 EXHIBIT 12–2 | Advantages and Disadvantages of Partnerships

Partnership Advantages Partnership Disadvantages

Versus Proprietorships:
• A partnership can raise more capital since capital comes
from more than one person.
• A partnership brings together the abilities of more than
one person.
• Partners working well together can achieve more than by
working alone: 1 + 1 7 2 in a good partnership.
Versus Corporations:
• A partnership is less expensive to organize than a
­corporation, which requires articles of incorporation from
a province or the federal government.
• A partnership is subject to fewer governmental
­regulations and restrictions than a corporation.
• A partnership agreement may be difficult to formulate.
Each time a new partner is admitted or a partner leaves
the partnership, the business needs a new partnership
agreement.
• Relationships among partners may be fragile. It is hard to
find the right partner.
• Mutual agency and unlimited liability create personal
obligations for each partner.
• Lack of continuity of the business is faced by a
­partnership but not a corporation.

Types of Partnerships
There are two basic types of partnerships: general and limited.

General Partnerships
A general partnership is the basic form of partnership organization. Each partner
is a co-owner of the business with all the privileges and risks of ownership. The
general partners share the profits, losses, and the risks of the business.

Since all partners are
­ ersonally liable for any debt
p ing a limited partnership. A limited partnership has at least two classes of partners:
of the business, it is extremely
important to choose a partner
carefully. This is one reason
some investors/partners
prefer the limited partnership
form of business organization.
Limited Partnerships
Partners can avoid unlimited personal liability for partnership obligations by form-
• There must be at least one general partner, who takes primary responsibility for the
management of the business. The general partner also takes most of the risk of
failure if the partnership goes bankrupt (liabilities exceed assets). In some limited
partnerships, such as real estate limited partnerships, the general partner often
invests little cash in the business. Instead, the general partner’s contribution is her
or his skill in managing the organization. Usually, the general partner is the last
owner to receive a share of partnership profits and losses. But the general partner
may earn all excess profits after the limited partners get their share of the income.
• The limited partners are so named because their personal obligation for the part-
nership’s liabilities is limited to the amount they have invested in the business.
Limited partners have limited liability similar to the limited liability that share-
holders in a corporation have. Usually, the limited partners have invested the bulk
of the partnership’s assets and capital. They therefore usually have the first claim
to partnership profits and losses, but only up to a specified limit. In exchange for
their limited liability, their potential for profits usually has a limit as well.

Limited Liability Partnerships Many professionals, such as doctors, lawyers, and

most public accounting firms in Canada—including most of those in Exhibit 12–1—
are now organized as limited liability partnerships (LLPs). An LLP can only be
used by eligible professions (such as accounting) and is designed to protect inno-
cent partners from negligence damages that result from another partner’s actions.
This means that each partner’s personal liability for other partners’ negligence is
limited to a certain dollar amount, although liability for a partner’s own negligence
is still unlimited. The LLP must carry an adequate amount of malpractice insurance
or liability insurance to protect the public.

664 Part 3 Accounting for Partnerships and Corporate Transactions

Partnership Financial Statements
Partnership financial statements are much like those of a proprietorship. Exhibit 12–3
compares partnership statements (in Panel A) against the same reports for a sole
proprietorship (in Panel B).
The key differences between a proprietorship’s and a partnership’s financial
statements are as follows:
• A partnership income statement includes a section showing the division of net
income to the partners.
• A partnership balance sheet reports a separate Capital account for each partner
in the section now called Partners’ Equity. Large partnerships may show one
balance, the total for all partners, and provide the details in a separate report,
also shown in Exhibit 12–3, called a statement of partners’ equity.

EXHIBIT 12–3 | Financial Statements of a Partnership and a Proprietorship (all amounts in thousands of dollars)

Panel A—PARTNERSHIP Panel B—PROPRIETORSHIP

KIM & GALARZA GALARZA CONSULTING
Income Statement Income Statement
For the Year Ended December 31, 2020 For the Year Ended December 31, 2020
Revenues $460 Revenues $460
Expenses 270 Expenses 270
Net income $190 Net income $190
Allocation of net income:
To Su-min Kim $114
To Luis Galarza 76 $190

KIM & GALARZA GALARZA CONSULTING

Statement of Partners’ Equity Statement of Owner’s Equity
For the Year Ended December 31, 2020 For the Year Ended December 31, 2020
Kim Galarza Total
Capital, January 1, 2020 $ 50 $ 40 $ 90 Capital, January 1, 2020 $ 90
Additional investments 10 — 10 Additional investments 10
Net income 114 76 190 Net income 190
Subtotal 174 116 290 Subtotal 290
Less: Withdrawals 72 48 120 Less: Withdrawals 120
Capital, December 31, 2020 $102 $ 68 $170 Capital, December 31, 2020 $170

KIM & GALARZA GALARZA CONSULTING

Balance Sheet Balance Sheet
December 31, 2020 December 31, 2020
Assets Assets
Cash and other assets $170 Cash and other assets $170
Total assets $170 Total assets $170
Partners’ Equity
Su-min Kim, capital $102
Luis Galarza, capital 68 Owner’s Equity
Total partners’ equity $170 Luis Galarza, capital $170
Total liabilities and equity $170 Total liabilities and equity $170

Chapter 12 Partnerships 665

 Try It!
1. Return to the story at the start of the chapter about Jenny and Sam's new miniature golf business.
Detail the contents of a partnership agreement and explain the importance of a written agreement to
Jenny and Sam.
2. Suppose you were giving the friends in the previous question advice on their decision to form a
partnership. Detail the advantages and disadvantages of their decision.
Solutions appear at the end of this chapter and on MyLab Accounting

Forming a Partnership
LO 2 Let’s examine the startup of a partnership. Partners in a new partnership may
How do we account for invest assets and their related liabilities in the business. These contributions are
partners’ investments in a journalized in the same way as for proprietorships, by debiting the assets and
partnership? crediting the liabilities at their agreed-upon values. Each person’s net contribu-
tion—assets minus liabilities—is credited to the equity account for that person.
Often the partners hire an independent firm to appraise their assets and liabili-
ties at current market value at the time a partnership is formed. This outside
evaluation assures an objective valuation for what each partner brings into the
business.
Suppose Katie Wilson and Dan Chao form a partnership on June 1, 2020, to
develop and sell computer software. The partners agree on the following values
based on an independent appraisal:

Wilson’s contributions
• Cash, $10,000; inventory, $40,000; and accounts payable, $80,000
• Computer equipment: cost, $800,000; accumulated amortization, $200,000;
­current market value, $450,000
Chao’s contributions
• Cash, $5,000
• Computer software: cost, $50,000; current market value, $100,000

The partnership entries are as follows:

The partnership records Wilson’s investment

receipts of the partners’ Jun. 1 Cash 10,000
initial investments at the
Inventory 40,000*
current market values of the
assets and liabilities because, Computer Equipment 450,000*
in effect, the partnership is Accounts Payable 80,000*
buying the assets and
Katie Wilson, Capital 420,000
assuming the liabilities at
their current market values. To record Wilson’s investment in the
partnership ($500,000 − $80,000).
Chao’s investment
Jun. 1 Cash 5,000
Computer Software 100,000*
Dan Chao, Capital 105,000
To record Chao’s investment in the partnership.
*Current market values are used.

666 Part 3 Accounting for Partnerships and Corporate Transactions

 The initial partnership balance sheet appears in Exhibit 12–4.
EXHIBIT 12–4 | Partnership Balance Sheet

WILSON AND CHAO

Balance Sheet
June 1, 2020
Assets Liabilities
Cash $15,000 Accounts payable $80,000
Inventory 40,000 Partners’ Equity
Computer equipment 450,000 Katie Wilson, capital 420,000
Computer software 100,000 Dan Chao, capital 105,000
Total partners’ equity 525,000
Total assets $605,000 Total liabilities and equity $605,000

Try It!
3. Marty Kaur invests land in a partnership with Lee Manors. Kaur purchased the land in 2014 for
$20,000. Three independent real estate appraisers now value the land at $50,000. Kaur wants $50,000
capital in the new partnership, but Manors objects. Manors believes that Kaur’s capital investment
should be measured by the book value of his land. Manors and Kaur seek your advice.
a. Which value of the land is appropriate for measuring Kaur’s capital: book value or current m
­ arket
value?
b. Give the partnership’s journal entry to record Kaur’s investment in the business on
September 1, 2020.
Solutions appear at the end of this chapter and on MyLab Accounting

Sharing Partnership Profits and Losses

Allocating profits and losses among partners can be challenging and can be a major LO 3
source of disputes. Any division of profits and losses is allowed as long as the partners How can we allocate
agree and it is in the partnership agreement. Typical arrangements include the following: profits and losses to the
partners?
• Sharing profits and losses based on a stated fraction for each partner, such as
50/50, or 2/3 and 1/3, or 4:3:3 (which means 40 percent to Partner A, 30 percent
to Partner B, and 30 percent to Partner C)
• Sharing based on each partner’s capital investment
• Sharing based on each partner’s service
• Sharing based on a combination of stated fractions, investments, service, and
other items
If the partners have not drawn up an agreement, or if the agreement does not state
how the partners will divide profits and losses, then, by law, the partners must share
profits and losses equally. If the agreement specifies a method for sharing profits but
not losses, then losses are shared in the same proportion as profits. For example, a part-
ner receiving 75 percent of the profits would likewise absorb 75 percent of any losses.
In some cases an equal division is not fair. One partner may perform more work
for the business than the other partner, or one partner may make a larger capital
contribution. In the preceding example, Dan Chao might agree to work longer
hours for the partnership than Katie Wilson in order to earn a greater share of
profits. Wilson could argue that she should receive more of the profits because
she contributed more net assets ($420,000) than Chao did ($105,000). Chao might

Chapter 12 Partnerships 667


The ratio of 2:1 is equal to
fractions of 2/3 and 1/3,
where the denominator of
the fraction is the sum of
the numbers in the ratio.
The ratio of 2:1 is also a
66.7%: 33.3% percent
sharing ratio.
The income summary account
was introduced in Chapter 4.
It holds profits/losses until
distributed to owners.
668 Part 3 Accounting for Partnerships and Corporate Transactions
contend that his computer software program is the partnership’s most important
asset, and that his share of the profits should be greater than Wilson’s share. Arriv-
ing at fair sharing of profits and losses in a partnership may be difficult.
We now demonstrate how to account for some options available in determining
partners’ shares of profits and losses using several different partnerships.
Sharing Based on a Stated Fraction
The partnership agreement may state each partner’s fraction of the total profits and
losses. Suppose the partnership agreement of Shannon Kerry and Raoul Calder
allocates two-thirds of the business profits and losses to Kerry and one-third to
Calder. This sharing rule can also be expressed as 2:1.
Net Income If net income for the year is $60,000, and all revenue and expense
accounts have been closed, the Income Summary account has a credit balance of
$60,000 prior to its closing.
Income Summary
Bal. 60,000
The entry to close this account and allocate the net income to the partners’
­Capital accounts is as follows:
Dec. 31 Income Summary 60,000
Shannon Kerry, Capital 40,000
Raoul Calder, Capital 20,000
To allocate net income to partners.
(Kerry: $60,000 3 2⁄3; Calder: $60,000 3 1⁄3)
Suppose Kerry’s beginning Capital balance was $50,000 and Calder’s was
$10,000. After posting, the accounts appear as follows:
Income Summary Shannon Kerry, Capital Raoul Calder, Capital
Clo.60,000 Bal. 60,000 Bal. 50,000 Bal. 10,000
Clo.40,000 Clo.20,000
Bal. 90,000 Bal. 30,000
Net Loss If the partnership had a net loss of $15,000, the Income Summary
account would have a debit balance of $15,000. In that case, the closing entry to
allocate the loss to the partners’ Capital accounts would be:
Dec. 31 Shannon Kerry, Capital 10,000
Raoul Calder, Capital 5,000
Income Summary 15,000
To allocate net loss to partners.
(Kerry: $15,000 3 2⁄3; Calder: $15,000 3 1⁄3)
A profit or loss will increase or decrease each partner’s
Capital account, but cash will not change hands. The ­Withdrawals account
records the cash each partner takes from the partnership.
Sharing Based on Capital Investments
Profits and losses are often allocated in proportion to the partners’ capital invest-
ments in the business. Suppose John Abbot, Erica Baxter, and Tony Craven are
partners in ABC Company. Their Capital accounts at the end of the first year of
business have the following balances, before closing entries. These amounts are
equal to the original capital investments for each of the partners since there were
no additional investments during the year and no earnings or withdrawals have
yet been posted to these accounts.

John Abbot, Capital $120,000

Erica Baxter, Capital 180,000
Tony Craven, Capital 150,000
Total Capital balances $450,000

Assume that the partnership earned a profit of $300,000 for the year. To allocate Do not round the interim
this amount based on capital investments, each partner’s percentage share of the percentages. For this chapter,
partnership’s total capital investment amount must be computed. round only the final dollar
We divide each partner’s investment by the total capital investment amount: amount to the nearest whole
dollar.
Abbot: ($120,000 ÷ $450,000) 5 26.6667%
Baxter: ($180,000 ÷ $450,000) 5 40%
Craven: ($150,000 ÷ $450,000) 5 33.3333%

These figures, multiplied by the $300,000 profit amount, yield each partner’s
share of the year’s profits:

Abbot: $300,000 3 26.6667% 5 $80,000.10, round to $80,000

Baxter: $300,000 3 40% 5 $120,000
Craven: $300,000 3 33.3333% 5 $99.999.90, round to $100,000

Or it can be calculated in one step as follows:

Abbot: ($120,000 ÷ $450,000) × $300,000 5 $ 80,000

Baxter: ($180,000 ÷ $450,000) × $300,000 5 $120,000
Craven: ($150,000 ÷ $450,000) × $300,000 5 $100,000
Net income allocated to partners 5 $300,000

The closing entry to allocate the profit to the partners’ Capital accounts is:

Dec. 31 Income Summary 300,000

John Abbot, Capital 80,000
Erica Baxter, Capital 120,000
Tony Craven, Capital 100,000
To allocate net income to partners.

After this closing entry, the partners’ Capital balances are:

John Abbot, Capital $200,000 $120,000 + $80,000

Erica Baxter, Capital 300,000 $180,000 + $120,000

Tony Craven, Capital 250,000 $150,000 + $100,000

Total Capital balances after allocation of net income $750,000

Chapter 12 Partnerships 669

 Sharing Based on Capital Investments and on Service
One partner, regardless of his or her capital investment, may put more work into the
business than the other partners. Even among partners who log equal service time, one
person’s superior experience and knowledge may be worth more to the firm. To reward
the harder-working or more valuable person, the profit-and-loss-sharing method may
be based on a combination of partner capital investments and service to the business.
In this case, the partners are allocated predetermined sums to be withdrawn. These
are not employee salaries, but they are sometimes referred to as a salary allowance.
Assume Michelle Wallas and Carolyn Borugian formed a partnership in which
Wallas invested $50,000 and Borugian invested $50,000, a total of $100,000. Borugian
devotes more time to the partnership and earns the larger income allocation from
the partnership. Accordingly, the two partners have agreed to share profit as follows:
❶ The first $40,000 of partnership profit is to be allocated based on the partners’
capital investments in the business.
❷ The next $60,000 of profit is to be allocated based on service (Wallas works
40 percent of the time and Borugian works 60 percent of the time), with Wallas
receiving $24,000 and Borugian receiving $36,000.
❸ Any remaining profit is allocated equally.
If net income for the first year is $125,000, the partners’ shares of this profit are
computed as follows:

A B C D
1 Wallas Borugian Total
2 Total net income $125,000
3 ❶ Sharing the first $40,000 of net income,
4 based on capital investments:
5 Wallas ($50,000 ÷ $100,000 3 $40,000) $20,000
6 Borugian ($50,000 ÷ $100,000 3 $40,000) $20,000
7 Total 40,000
8 Net income remaining for allocation 85,000
9 ❷ Sharing of next $60,000, based on service:
10 Wallas 24,000
11 Borugian 36,000
12 Total 60,000
13 Net income remaining for allocation 25,000
14 ❸ Remainder shared equally:
15 Wallas ($25,000 3 ½) 12,500
16 Borugian ($25,000 3 ½) 12,500
17 Total 25,000
18 Net income remaining for allocation $0
19 Net income allocated to the partners $56,500 $68,500 $125,000

The net income (loss) allocated to each partner should always equal
the total net income (loss). $56,500 + $68,500 = $125,000

On the basis of this allocation, the closing entry is as follows:

Dec. 31 Income Summary 125,000
Michelle Wallas, Capital 56,500
Carolyn Borugian, Capital 68,500
To allocate net income to partners.

670 Part 3 Accounting for Partnerships and Corporate Transactions

Sharing Based on Service and Interest
Partners may be rewarded for their service and their capital investments to the
business in other ways. In the sharing plan we just saw, the capital investment
was recognized with a lump-sum payment. Another option is to allocate an inter-
est allowance calculated as a percentage of their Capital balances. It is important
to remember that the service (salaries) and interest amounts discussed above are
not the business expenses for salaries and interest in the usual sense. Service and
interest in partnership agreements are ways of expressing the allocation of profits
and losses to the partners. The service component rewards work done for the part-
nership. The interest component rewards a partner’s investment of cash or other
assets in the business. But the partners’ service and interest amounts are not salary
expense and interest expense in the partnership’s accounting or tax records.
Allocation of Profit Assume Edward Meyers and Pierre Zrilladich form an
oil-exploration partnership. Their partnership agreement outlines the following
income allocation:
❶ The partnership agreement allocates an annual “salary” of $107,000 to Meyers
and $88,000 to Zrilladich.
❷ After these amounts are allocated, each partner earns 8 percent interest on his
beginning Capital balance. At the beginning of the year, their Capital balances
are $200,000 and $250,000, respectively.
❸ Any remaining net income is divided equally.
Partnership profit of $240,000 for the current year will be allocated as follows:

A B C D
1 Meyers Zrilladich Total
2 Total net income $240,000
3 ❶ Allocation for service:
4 Meyers $107,000
5 Zrilladich $88,000
6 Total 195,000
7 Net income remaining for allocation 45,000
8 ❷ Interest on beginning capital balances:
9 Meyers ($200,000 3 0.08) 16,000
10 Zrilladich ($250,000 3 0.08) 20,000
11 Total 36,000
12 Net income remaining for allocation 9,000
13 ❸ Remainder shared equally:
14 Meyers ($9,000 3 ½) 4,500
15 Zrilladich ($9,000 3 ½) 4,500
16 Total 9,000
17 Net income remaining for allocation $0
18 Net income allocated to the partners $127,500 $112,500 $240,000

Allocation of a Negative Remainder In the preceding illustration, net income

exceeded the sum of service and interest. If the partnership profit is less than the
allocated sum of service and interest, a negative remainder will occur at some stage
in the allocation process. Even so, the partners use the same method for allocation
purposes. For example, assume that Meyers and Zrilladich Partnership earned only
$205,000 in the current year.

Chapter 12 Partnerships 671

 A B C D
1 Meyers Zrilladich Total
2 Total net income $205,000
3 ❶ Allocation for service:
4 Meyers $107,000
5 Zrilladich $88,000
6 Total 195,000
7 Net income remaining for allocation 10,000
8 ❷ Interest on beginning capital balances:
9 Meyers ($200,000 3 0.08) 16,000
10 Zrilladich ($250,000 3 0.08) 20,000
11 Total 36,000
12 Net income (loss) remaining for allocation (26,000)
13 ❸ Remainder shared equally:
14 Meyers [($26,000) 3 ½] (13,000)
15 Zrilladich [($26,000) 3 ½] (13,000)
16 Total (26,000)
17 Net income remaining for allocation $0
18 Net income allocated to the partners $110,000 $95,000 $205,000

Allocation of a Net Loss

A net loss would be allocated to Meyers and Zrilladich in the same manner outlined
for net income. The sharing procedure would begin with the net loss and then allo-
cate service interest and any other specified amounts to the partners.
For example, assume that Meyers and Zrilladich Partnership had a loss of
$30,000 in the current year.

A B C D
1 Meyers Zrilladich Total
2 Total net income (loss) ($30,000)
3 ❶ Allocation for service:
4 Meyers $107,000
5 Zrilladich $ 88,000
6 Total 195,000
7 Net income (loss) remaining for allocation (225,000)
8 ❷ Interest on beginning Capital balances:
9 Meyers ($200,000 3 0.08) 16,000
10 Zrilladich ($250,000 3 0.08) 20,000
11 Total 36,000
12 Net income (loss) remaining for allocation (261,000)
13 ❸ Remainder shared equally:
14 Meyers [($261,000) 3 ½] (130,500)
15 Zrilladich [($261,000) 3 ½] (130,500)
16 Total (261,000)
17 Net income remaining for allocation $0
18 Net income (loss) allocated to the partners ($ 7,500) ($22,500) ($ 30,000)

672 Part 3 Accounting for Partnerships and Corporate Transactions

 In this case, Zrilladich might be surprised to be allocated such a large share of
the loss. It is important for partners to understand the partnership agreement and
what it might mean in case of a loss.

Partner Withdrawals (Drawings)

Partners need cash for personal living expenses like anyone else. Partnership agree- According to the Income Tax
ments usually allow partners to withdraw cash or other assets from the business. Act, partners are taxed on
These withdrawals are sometimes called drawings and are recorded in a separate their share of partnership
Withdrawals or Drawings account for each partner. (Drawings from a partnership income, not on the amount of
are recorded exactly as they are for a proprietorship.) Assume that both Edward their withdrawals.
Meyers and Pierre Zrilladich are allowed a monthly withdrawal of $12,500. The
partnership records the March withdrawal with this entry:

Mar. 31 Edward Meyers, Withdrawals 12,500

Cash 12,500
Monthly partner withdrawal of
cash—cheque #789.

Mar. 31 Pierre Zrilladich, Withdrawals 12,500

Cash 12,500
Monthly partner withdrawal of
cash—cheque #790.

During the year, each partner’s Withdrawals account accumulates 12 such

amounts, a total of $150,000 ($12,500 × 12). At the end of the year, the general led-
ger shows the following account balances immediately after net income has been
closed to the partners’ Capital accounts.
Assume the January 1 balances for Meyers and Zrilladich are shown below and
that at the end of the year $205,000 of profit has been allocated on the basis of the
illustration on page 671.

Edward Meyers, Capital Pierre Zrilladich, Capital

Jan. 1 Bal. 200,000 Jan. 1 Bal. 250,000
Dec. 31 Net income 110,000 Dec. 31 Net income 95,000

Edward Meyers, Withdrawals Pierre Zrilladich, Withdrawals

Dec. 31 Bal. 150,000 Dec. 31 Bal. 150,000

Total of $12,500 per month

for 12 months

The Withdrawals accounts must be closed at the end of the period:

Dec. 31 Edward Meyers, Capital 150,000 Withdrawals are closed to the

Edward Meyers, Withdrawals 150,000 Capital account as part of the
To close the Withdrawals account to Capital. closing process.
See Chapter 4.
Dec. 31 Pierre Zrilladich, Capital 150,000
Pierre Zrilladich, Withdrawals 150,000
To close the Withdrawals account to Capital.

Chapter 12 Partnerships 673

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in the same manner. The gravity piece was held fast between two
such surfaces. None of the pieces were permitted to be touched by
hand while an observation was being made. If now one of these
pieces were loosened the millionth of an inch, the gravity piece
would slide slowly down. If loosened two millionths of an inch, the
gravity piece would descend twice as fast, and so on. I made a
design for the application of this system to the correction of the
dividing-wheel, so that a difference of pitch of one millionth of an inch
could be shown and removed, the gravity piece being made to
descend at the same rate of motion to whatever tooth it might be
applied. I thought Mr. Whitworth would be interested in this novel and
important application of his method, and I showed it to him. This was
the encouraging and patronizing reply I received: “You had better
inform yourself, sir, about what already exists. You will find a perfect
dividing-wheel in my shop. What do you want better than that?” This
wheel had divided my governor gear patterns, but spindles wabbling
loose in their holes accounted for most of their defects.
The above recital is sufficient to show the conditions by which I
found myself surrounded and the kind of man I had to deal with.
It may be supposed that when my agreement with Mr. Whitworth
was concluded, the disappointment I had experienced on the
stoppage of Ormerod, Grierson & Co. was quite relieved. But that
does not express it. In fact, my revulsion of feeling could hardly be
described. I believed that I had met a piece of good fortune that was
unparalleled. I had got into the most famous machine-shop in the
world, a shop in which in years gone by had been originated almost
everything then regarded as most essential in machine construction.
No one had ever before introduced anything into that shop. Its
business, in its various departments, was confined to the
manufacture of Mr. Whitworth’s own creations. I should never have
dreamed of such a thing as getting into it. That I was there, and had
been received so cordially, bewildered me. I could scarcely believe it.
I knew also that Mr. Whitworth’s name was a tower of strength. His
influence with the public at large respecting everything mechanical
seemed really that of a magician. I felt that the fact that the
manufacture of my engine and governor had been taken up by Mr.
Whitworth placed them on an eminence at once.
 I was conscious also that I was quite prepared to improve this
opportunity, grand as it seemed to be. The engine had been
abundantly proved. The success of the condenser I felt sure of, a
confidence that was found to have been fully justified. Everything on
my part was in readiness. The drawings and patterns for several
sizes of the engines were complete. I was certainly excusable for
anticipating that I should enter at once upon a rapidly growing and
prosperous business.
With my rude awakening from this “dream of bliss” the reader has
already been made acquainted. The causes which had brought
these works, so far as their machine-tool department was
concerned, down from such a height of excellence as they must for a
long time have occupied, to such a depth of ignorance and
helplessness as existed on my entrance into them, I never fully
knew. I heard that some years before there had been an extensive
strike in the works, and that Mr. Whitworth had discharged a large
body of skilled workmen and had filled their places with laborers.
They had a pretty large drawing-office—empty. I was told that until a
short time before my coming they had kept one draftsman employed,
but no one paid any attention to his drawings. Mr. Widdowson
regarded them merely as suggestions, and he and the foreman
pattern-maker altered them as they liked, and finally the farce of
having drawings made at all was abandoned. It was not found
difficult to run these closely shut works for a long time on their
reputation.
The state of affairs was distressing enough. The few engines that
we could manage to finish we could only build, in many of their parts,
on new lathes, which were used by them as long as they dared to,
before sending them to their owners. But I kept up a brave heart. At
any rate the personal influence of Mr. Whitworth remained. Indeed I
already saw its value in many ways. Then the pattern-shop, foundry
and smith-shop were equal to our requirements, and I felt confident
that Mr. Hoyle could induce Mr. Whitworth to have the improvements
and changes made, especially in the lathes and boring-machines,
which would make it possible for us to do the work. Mr. Hoyle had
become famous in the shop as the only man who had ever been
able to influence Mr. Whitworth. He had lately given a striking
example of his power. Mr. Whitworth was, years before, the designer
of the box frame, which gave to many machine tools a rigidity
incomparably superior to that which could be got by any method of
ribbing. This box system was then established in universal use, both
in England and on the Continent. Not long before my coming Mr.
Whitworth had been looking into the cost of the cores that these box
forms required, and concluded that he could not allow such an
expense any longer, and ordered a return to the method of ribbing.
The superintendent and foremen, to whom this order was
communicated, were amazed at so ruinous and indeed insane a
step. No one else dared to open his mouth; but Mr. Hoyle undertook
the task of dissuading him from it, and after a long struggle finally
succeeded in inducing him to rescind his order. So I confidently
looked to him for the salvation of the engine.
Then suddenly a new trouble arose. After a delay of some months,
the agreement between Mr. Whitworth and myself, reduced to writing
by his solicitor, was put into my hands for signature. I found that it
corresponded with our verbal agreement, except that Mr. Whitworth
reserved to himself the right to make alterations in the engine, in any
respect whatever, in his discretion. To say that I hesitated about
signing such an abandonment would not be true; I never thought of
such a thing as signing it. Mr. Whitworth was probably the only man
in the world who would have thought of making such a demand, and
was certainly the last man in the world to whom it should be granted.
The first thing he would probably have done would have been to
make the crank and cross-head pins run in solid bearings. I had
regarded his talk about “the perfect steam-engine” at our first
interview as idle words; but here was the provision for giving these
words effect. Indeed, he now assured me that the opening to his
scheme afforded by my engine formed his inducement for taking it
up, and that he expected me to understand that from what he then
said. Here was a situation! I knew that in the multifarious excursions
of his restless mind the steam-engine had never been included.
These excursions seemed to have led in all directions except that.
About the steam-engine and its “fundamental principles,” except
those constructive principles that it had in common with all
machines, I was sure he had not the least idea. The scheme was
childish. I could only think of the little boy who wanted a penny to go
down-town. “What are you going to buy?” said his amused father. “I
don’t know; shall see something I want when I get there.” This
seemed to me, and correctly as I afterwards became satisfied, to
represent Mr. Whitworth’s “open-mindedness” on this subject.
Now, Mr. Whitworth was the most dangerous man possible to be
entrusted with such a power. He could not work with anybody else.
His disposition was despotic. He looked only for servile obedience to
his orders. Besides this, he had no conception of the law of growth.
In his own mind he had anchored both tool construction and gunnery
where they were to remain forever, and he purposed to do the same
thing with the steam-engine, as soon as he should have time to
attend to it.
So our agreement never was executed. I confidently expected him
to yield on this point, which I was settled that I would never do, and I
found in the end that he as confidently expected me to yield, which
he was settled that he would never do. Meanwhile we got along on a
modus vivendi plan, which could only last through an emergency,
and during which, of course, nothing could be done towards settling
the business on a substantial foundation. The emergency in this
case was getting through the Paris Exposition. Before coming to
that, however, I have something else to relate.
We received an order from Pooley & Son, proprietors of the India
Mills, Manchester, for a horizontal condensing engine to drive the
machinery of their blowing-room, that in which the cotton is opened
and cleaned and receives its first carding operations. The growth of
their business had made it necessary for them to increase their
power, which they planned to do by driving this portion of their
machinery separately. This engine was interesting for two reasons. It
was the first engine ordered in England to which my horizontal
condenser was applied, and it was the first mill engine in England
from which the power was transmitted by a belt.
My business was transacted entirely with the younger Mr. Pooley,
who seemed to be the practical head of the concern. Our first
meeting has remained vivid in my recollection, as illustrating the
English brusqueness of manner.
 Calling at his office in response to an invitation by post, I was met
on opening the door after the call “come in” by the abrupt question,
“What do you want?” I was not wholly unused to this kind of greeting
and so told him who I was and what I wanted, when of course his
manner changed at once. We became very good friends, and should
he be living and this meet his eye, I send him my salutation.
We had quite a discussion on the question of a belt. I urged it, and
he would not listen to it. My statement that belts were used
exclusively in cotton-mills in America had no influence. I discovered
that it makes all the difference in the world who tells a thing. After he
had, as we both supposed, made his final decision to follow the
universal custom and employ gearing, he happened to meet his
friend Mr. Hetherington, the same man already mentioned in
connection with the Harrison boiler. Mr. Hetherington had just
returned from a trip to “the States,” and had visited the Lowell and
Lawrence cotton-mills, and this was part of their conversation:
“Did you see anywhere power taken from a prime mover by a
belt?”
“I did not see anything else.”
“Is that so? This is just what Porter told me, but I could not credit it.
Did they seem to give satisfaction?”
“That is what every one assured me. They would not use anything
else.”
And so I received an order for a belt, 24 inches wide, to be
imported from America, with the clamps, rivets, and cement needed
to put it on endless, an operation of which no workman in England
had any idea, so I had to do it myself. I sent the order to Mr. Allen to
be placed, and received quite promptly a carefully selected belt, of
hides of uniform thickness, which gave the highest satisfaction.
The following is a copy of the bill for the first American belt ever
sent to England. I included an order for a side of lace leather, to
enable them to try the American style of lacing belts. This leather is
horse hide, their sheep-skin lacing would not be strong enough.

New York, December 15, 1866.

Mr. Chas. Pooley.
 Bought of STEPHEN BALLARD,
(Successor to Stearns & Ballard),

Manufacturer of Every Description of Leather Belting,

Also, Dealer in Vulcanized Rubber Belting, Hose and Packing, Belt Rivets,
Belt Hooks, etc.,

Extra Quality Lacing Leather,

No. 333 Pearl Street, Franklin Square (Harpers’ Building).

51 ft. 24-inch Donb Belt 692 352.91

2 lbs. Rivets 80 1.60
1 „ Cement 1.00
1 Side Lacing 5.00
Cartage .50
1 Cask 1.25
Insurance 4.15 366.52
Collection 2¹⁄₂% 9.16
375.68

I put this belt on quite loose. The bottom side was the tight one,
and the upper side hung in a loop nearly three feet deep. This
exhibited the uniform running of the engine in a striking manner. As
is well known, variations of speed produce waves in such a loop, the
height of which waves indicates the amount of these variations. This
belt hung motionless. The most careful observations on the loop did
not indicate that it was running at all. The engine had no fly-wheel;
the belt drum, 10 feet in diameter, served this purpose also. This
showed the value in this respect of high speed, 150 turns per minute.
This absolute uniformity of motion surprised me, I knew nothing
about the equalizing action of the reciprocating parts of the engine,
to which this remarkable result was largely due. I was then absorbed
in balancing, which was as far as I had advanced, and in this case,
as previously in the governor, I “had builded better than I knew.”
The accompanying diagrams are from a duplicate of the Pooley
engine built at the same time for a Mr. Adams, a paper-maker in the
north of England. This engine was directly connected to the line of
shaft. I was called home from Paris to go to Mr. Adams’ mill and start
that engine. Mr. Adams’ mill was not yet connected, and I was
obliged to return to Paris after taking friction diagrams, of which the
following are examples.

ATMOSPHERE
SCALE, 16 LBS. TO 1 INCH
ATMOSPHERE
SCALE, 16 LBS. TO 1 INCH

Diagrams from Engine Built for Mr. Adams.

 CHAPTER XIII

The French Exposition of 1867. Final Break with Mr. Whitworth.

he French Exposition of 1867 was the second in the

series of expositions held in Paris at intervals of
eleven years, from the first in 1856 to the last, thus far,
in 1900. In this exposition the Emperor Napoleon
planned to celebrate his entrance uninvited into the
select circle of crowned heads by bringing all his new
cousins to visit him in his capital. He succeeded pretty well. Asia was
represented by the Sultan of Turkey and the Shah of Persia. All the
sovereigns of Europe were there (but not all at the same time) with
the exceptions of Victor Emmanuel, who said he was too poor to go,
and Queen Victoria, who could not be induced to leave her
retirement. The sovereign people of the United States were also
pretty well represented. One other “emperor” was not there. With the
zeal of a new convert, Louis Napoleon had attempted to take
advantage of the circumstance that the United States had business
enough of their own to attend to, and improve the opportunity to
plant monarchical institutions on this continent. Maximilian, a brother
of the Emperor of Austria, the first and last Emperor of Mexico, was
installed under the protection of French bayonets. Affairs in the
United States did not take the turn that Napoleon had hoped for, and
in compliance with a courteous request from the President that he
would withdraw his troops from Mexico and save him the
disagreeable necessity of driving them out, the French withdrew,
leaving the unfortunate Maximilian a prisoner in the hands of the
Mexicans.
On a day in the summer of 1867, a grand function was celebrated
in the Palais de l’Industrie, the building on the Avenue des Champs
Elysées in which the exposition of 1856 had been held, for the
distribution of gold medals to the successful exhibitors in this
exposition of 1867. The Emperor presided, surrounded by
sovereigns and their suites, and an assembly of 20,000 invited
guests and holders of season tickets. In the midst of the ceremonies,
an official entered and handed to the Emperor an envelope. After
reading its contents he crossed over to the seat of the Austrian
ambassador and placed it in his hands. After reading it the
ambassador withdrew with his suite, and the proceedings were
continued to their close. That evening the public learned what this
envelope contained. It was a cablegram announcing the execution of
the quondam emperor, Maximillian, by the Mexican government.
From this point the fall of Napoleon proceeded steadily until he
became “the man of Sedan.” This dramatic scene, marking the
culminating point in his career, has, I believe, escaped the notice of
historians.
The main building of the exposition of 1867, the first one held on
the Champ de Mars, was designed on a plan that has not been
repeated. It was a long building with semicircular ends, built around
a narrow open court, the length of which was equal to that of its
parallel sides. It was divided among the nations as a Yankee would
divide a pie if baked in a dish of similar form, while the various
classes of exhibits occupied, in the several nations, spaces equally
distant from the central court. Thus, as assumed in the plan, the
visitor passing through any radial avenue would see all the exhibits
from one country, and passing through an avenue laid out around
the central court would see all the exhibits of one class. The fine arts
were at the center, much of the statuary in the open court, then
decorative art, and so on, class after class, until that of machinery
which surrounded the whole, except that outside of this were the
restaurants of all nations.
The plan was practically on many accounts a failure, first, from the
exceedingly unequal lengths of floor spaces allotted to the different
departments, the mean length of the machinery court, for example,
being between two and three times that devoted to the fine arts, and,
second, that it was utterly inadequate to accommodate the exhibits
in many departments. There was no adaptability in the system. The
consequence was the erection, in the ample outside area of the
Champ de Mars, of an enormous number of separate buildings, by
all nations, for particular classes of exhibits, some of which buildings
were quite large.
Although I exhibited in the British section, I sympathized deeply
with the American exhibitors, who were having lots of trouble. Mr.
Seward had appointed as the United States commissioner an
American gentleman who had lived in France for twenty years, who
was ignorant of America and Americans in a phenomenal degree,
and was indifferent and despotic in his treatment of the helpless
exhibitors, until their exasperation reached such a pitch that I heard it
said every one of them would be glad to pull on a rope to hang him. I
will give two illustrations.
Mr. Corliss had been persuaded by Mr. Pickering to send over an
engine to drive the United States machinery exhibit. When the
engine arrived, it was found that the commissioner, although he had
been advised of this arrangement, had paid no attention to it, but had
purchased a French engine and installed it already for this purpose.
The Corliss engine was set by the side of this one, and ran idle
through the exhibition; never had a belt on. To make the matter
worse, the French engine was run every Sunday, although the entire
United States exhibit was covered up, and, as it could not run longer
than a week without stopping for repairs, it was idle for this purpose
every Monday, and this arrangement was sustained by the
commissioner.
As other nations were putting up separate buildings for the
overflow of their exhibits, the commissioner thought the United
States should do the same. So in the winter previous he had got a
special appropriation for this purpose through Congress, and erected
his building. When finished he found it was all a blunder: he had
absolutely nothing to put in it. The United States exhibitors were fully
accommodated in the main building. What does he do but order
enough of them into the side building to fill it, leaving unoccupied
spaces in the main building. A number of our most eminent firms
were driven there, being refused space in the main building. In the
machinery court an enormous empty space was rented by the
commissioner to a concern manufacturing collars and cuffs.
 So far as space was concerned, the machinery department
seemed to have the place of honor. It surrounded all the other
classes of exhibits, and was much wider and higher than any other. It
had a central gallery which I was told was seven eighths of a mile
around. This gallery carried the shafting. The exterior location of this
department was necessary, in order to have proper connection with
the boilers and systems of piping for both steam and water. Except
the American section, which was only one half occupied, it was
crowded with exhibits. The engines exhibited in motion in the main
building, of which there were a large number, were all condensing
engines, water from the Seine being quite convenient.

EXPOSITION UNIVERSELLE, PARIS, 1867.

DIAGRAM FROM THE “ALLEN” ENGINE, EMPLOYED IN DRIVING
MACHINERY
IN THE BRITISH SECTION, AND MANUFACTURED BY
THE WHITWORTH COMPANY, LIMITED, MANCHESTER.
ENGINE, 12 INCHES BY 24 INCHES, REVOLUTIONS PER MINUTE, 200.
SCALE, 16 LBS. TO THE INCH.

I took to this exposition five engines. One of them was 12×24

inches, making 200 revolutions per minute. I advanced the speed
from 600 feet to 800 feet per minute, to show what both the engine
and the condenser could do. After all, however, I did not show one
half of what with proper port areas the high-speed system was
capable of. The ports were insufficient, having been adapted to a
speed of 150 revolutions per minute. I took great satisfaction in
showing the condenser to my old friends, Easton, Amos & Sons,
who were all there, at one time or another, during the exposition.
Before the exposition opened we had on hand at the works four
condensers, one for an engine the Whitworth Company were
building for themselves, two for the parties already mentioned, and
the one for the exposition engine. As this was the first one required
to be running, I had to make the first test of the condenser in this
public way, which I immensely enjoyed doing.
Through the influence of Mr. Whitworth, we received an order from
Trinity House, which is the British lighthouse board, for two engines
to drive the machinery of an electric light. The English and the
French governments each made an exhibit of such a light, at the
summit of a high tower. The current was produced by rapidly
revolving magnets, a large number of which were set in a wheel.
Everything in this English exhibit was in duplicate. The
requirement was that either engine should drive either or both
electric machines. This involved the use of four clutches and a lot of
gearing. I measured the power required by one machine, at the
works in London where they were made, indicating their shop engine
with the light on and with the light off. To make sure I repeated this
three times. I found that one of my engines, 6×12 inches, non-
condensing, at 300 revolutions per minute, would drive the two
machines, with the steam pressure we were to have, I think 70
pounds, and cut off at one quarter of the stroke, while it was capable
of following five eighths of the stroke. So two of these engines were
furnished. The exposition was well advanced before this machinery
was ready for its trial. A large crowd had assembled to witness it.
With both machines on, the engines could only crawl along. The
superintendent of the British mechanical section ordered one
machine taken off. There was very little improvement. Then this royal
engineer, detailed from the army, and whose qualifications for his
position consisted in absolute ignorance of anything mechanical,
declared the trial finished, and strutted off with the remark, “There
has been a great blunder made here in providing the power.” The
men in charge of the machinery looked at me quite speechless. I
asked them to throw off the other machine also. This was done,
when it appeared that both engines, with steam following five eighths
of the stroke—for I had indicators on both of them to show it—could
not drive the gearing, except at a snail’s pace. They were then driven
to examine the gearing for resistances, and found the teeth wedged
in the spaces throughout. This gearing was removed and proper
running gears substituted for it, and after ten days’ delay away went
the engines at full speed. On this second trial one engine could drive
both machines, cutting off at one-quarter stroke, precisely as my
measurement of the power had shown. They then ran perfectly
through the exposition and were accepted by Trinity House. Did the
superintendent apologize to me for his hasty judgment or
congratulate me on my success? He never made the slightest
allusion to it.
My fourth engine, of the same size, had been spoiled for practical
use by having the upper half of the cylinder and steam-chest planed
off, to show the cylinder and valves in section. It was belted from the
large engine to run very slowly, and thus exhibited the valves and
gear in motion to the end of the exposition. Mr. Whitworth wanted his
friend Mr. Owen to purchase this model for the South Kensington
Museum, but it appeared to Mr. Owen that Mr. Whitworth ought to
present it to the museum. This I learned from Mr. Hoyle. What was
finally done with it I have forgotten, if, indeed, I ever knew.
My fifth engine, of the same size, 6×12 inches, I got up to show
what the capabilities of high speed really were, so far as smooth and
safe running were concerned. The reciprocating parts, which
weighed altogether only 40 pounds, were exactly balanced. I did this
by rolling the crank-disk on a boring-table, with 40 pounds hung on
the crank-pin, and cutting out the lead from the hollow disk opposite
the pin, where I had purposely put it in somewhat in excess, until the
pin came down to the horizontal position. This brought the inertia of
the reciprocating parts of the engine, at every point in the revolution,
into equilibrium with the horizontal component of the centrifugal force
of the revolving counterweight. The vertical component of this force,
or rather its upward stress, for downward it would be resisted by the
whole mass of the earth, remained to be dealt with. To prevent the
whole engine from being lifted at the crank end by this stress at
every revolution might have been accomplished by putting on a
heavy fly-wheel; but for my use I wanted a very small one. The fly-
wheel I put on the shaft was a solid disk, 18 inches in diameter and
¹⁄₂ inch thick, with a rim 1 inch square. The bed of the engine I filled
with lead, and set it on a block of Caen stone 3 feet thick and wide
and 5 feet long. To this stone it was firmly bolted, and I was ready for
business. The governor was speeded to hold the engine at 500 turns
per minute. As it might be difficult for some persons to count this
speed, I put a little pinion on the end of the shaft, engaging with a
larger wheel, one to ten. Fifty revolutions per minute could be
accurately counted, and the speed was put beyond dispute. I was
guilty of one oversight: I did not protect this gear. A French
gentleman had the skirt of his frock-coat caught in it, and I thought it
never would be got out. The engine had been running only two or
three days, but the speed being then well established, I took off the
gear. I ought to have protected it instead, and have had it to
substantiate the big story I am going to tell, but it never occurred to
me.
The engine running idle, I commenced very soon the exhibition for
which I had made all this preparation. That was to hold the governor
down by pulling the end of the lever up and letting the engine fly;
which it did without a jar or a sound, only phantoms of the cross-
head and connecting-rod being visible. That was my daily
amusement and must have been repeated many hundred times in
the course of the exposition, and of course always attracted a crowd.
We had no means of counting the speed, but I judged it to be
more than 2000 turns per minute. When I released the governor and
the speed fell gradually to 500 turns, it appeared to every one as if
the engine were going to stop. But the governor never reacted, and
soon the eye became accustomed to the slower speed. This
presented quite a curious phenomenon. The connecting-rod was
especially adapted to this enormous speed, by being made of the
form already shown, and which I afterwards adopted for all my
engines. This engine never gave any trouble, and was sold, I think to
Ducommen & Co., the purchasers of the large engine. The electric
light with its engines was installed at the South Foreland Lighthouse,
on the Shakespeare Cliff, east of Dover, if I remember rightly. We
brought nothing back to England with us.
I went to Paris a few days before the opening of the exposition,
and found my main engine already in running order, installed next to
the Whitworth exhibit of tools, and selected by the imperial
commission as one of the engines employed to give motion to the
machinery exhibited.
By an imperial decree, the opening ceremonial of the exhibition
was to take place on Monday, April 2, at 2 p.m., and everything was
to be absolutely completed before that hour. The engines were to
have been tested the previous Saturday. Every engine in the building
was ready, but the imperial commission itself was behind. There was
no steam. The first interview I had with the superintendent of the
British machinery department was on this Saturday, when he came
around to notify the several English engine exhibitors to be in
readiness to run their engines the next day, Sunday, in order to make
sure that there should be no hitch on Monday, I told him I should not
run my engine on Sunday. “Very well,” said he, “we will run it for
you,” and stalked off. Before going away I took out the pin at the end
of the governor lever connecting the governor with the valve motion
and put it in my pocket. Never heard any reproof, put the pin back on
Monday, and when they gave us steam the engine started off as if it
had always been running, and continued to do so until the signal for
shutting down at 5 o’clock. I had my hand on the wheel of the stop-
valve to close it, when suddenly all the valve-rods of the engine bent
and tangled up, and the exclamation was heard on all sides, “The
high-speed engine has come to grief the very first day.”
On examination it was found that the cast-iron stuffing-box gland
on one of the valve-stems had fired, and was fast on the stem. One
of our troubles at the Whitworth works was the habit of the workmen,
which may have been common to all toolmakers, of making close
fits. We had no standard reamers nor any system whatever, and Mr.
Watts, finding on his inspection everything too tight to run, had to
have holes enlarged and stems reduced by grinding with Turkey
dust. Sometimes this had to be done over and over. He was very
thorough, but this once he missed it, with the above result. The case
looked pretty bad, but luckily nothing was broken, and when the
exposition opened at 9 o’clock the next morning every trace of the
accident had disappeared and the engine ran as if nothing had
happened, and continued to do so for several months, till the close of
the exposition. We took pains that night, while we were about it, to
make sure against any repetition of that performance.
I had nearly forgotten to mention a little surprise that I had: The
day after my arrival a friend who had preceded me a few days said
to me, “Come with me; I want to show you something.” He led me
through the entire circuit of the machinery hall, and showed me
engines with my central counterweight governor brought to that
exposition from every country in Europe. I learned afterwards in
conversation that, following its exhibition in London, five years
before, the use of this governor on the Continent had become quite
general.
The day after the opening I asked the superintendent when I ought
to expect a visit from the jury of award. I told him it was necessary
that I should return to Manchester to bring over my family, and I was
anxious not to miss the jury. “I would advise you,” said he, “to go at
once. The jury will not be organized for a week or more.” I left that
night, leaving the engine in charge of a young Frenchman to run it,
and was back in five days. The first thing this man had to tell me
was: “The jury were here yesterday. They did not stay but a few
minutes. All their remarks that I heard were in French, so I think they
must all have been Frenchmen. I heard them say, ‘An engine
running at that speed (200 revolutions per minute) will knock itself to
pieces before the exposition is over.” This although it was running in
absolute silence before their eyes. “They did not ask me any
questions.” “What did they say about the condenser?” (The Bourdon
gauge showed more than 28 inches vacuum all the time.) “They
laughed at that; said no engine ever maintained such a vacuum,”
which was quite true. I hurriedly sought out the superintendent. In
answer to my complaint he said flippantly, “Oh, that visit was only
preliminary. They will be around again in a few days.” I have waited
for that visit ever since. Never saw or heard of the jury any more, but
when the list of gold medal awards was published my name was not
on it.
 I learned afterwards that the order to all the juries was to
commence their labors the morning after the opening of the
exposition, and have their reports in within three weeks. The
superintendent must have been officially informed of this order, and
he deliberately misled me. I have always wondered if this was his
revenge on me for not having run on Sunday as he ordered.
So far as concerns their judgment on the engine, “before the
exposition was over” it had won the admiration of every engineer in
Europe. Mr. John Hick of Bolton, then the leading builder of
stationary engines in England, and afterwards the head of the great
engineering firm of Hick, Hargreaves & Co., made a visit to the
engine every afternoon during his stay, sometimes watching it for a
long time. It had a fascination for him. He told me that no amount of
testimony would have made him believe that an engine could have
been made to run so smoothly and silently at such a speed, or to
maintain such a vacuum. He said that if my engine shown in London
had made anything like so favorable an impression on his mind, he
would have made me a proposition for its manufacture; but it did not.
The reason for this I had learned long before, the reason why it did
not impress any one favorably, it was non-condensing. He added
that he had since made other arrangements which made such
proposition now impossible. I knew what those arrangements were.
He had two years before taken up the manufacture of the Corliss
engine, under the management of Mr. William Inglis, a Canadian
engineer, by whom this engine had been successfully introduced into
England. I knew Mr. Inglis well, and rejoiced in his success, as every
one who knew him must have done. As for any rivalry between us
such a thing was never thought of, there was room for both of us ten
times over.
I was very courteously waited upon by a French engineer, who
asked me if I were acquainted with the Deluel vacuum-gauge. I told
him that I was not. He said that he was happy to introduce it to my
notice. The vacuum shown by the Bourdon gauge on my condenser
was so remarkable, especially with an air-pump running so swiftly,
that it could not be accepted with confidence by engineers, unless
actually shown by the mercurial column. The Deluel gauge was the
only one in which this was employed. With many apologies for what
was indeed the greatest kindness to me, he ventured to suggest that
the Deluel gauge be placed on the condenser. He kindly gave me
the address of the firm in Paris. A sharp Yankee will probably
recognize him as an accomplished drummer for the house. This did
not occur to me, but I am under obligation to him all the same.
I lost no time in getting a Deluel gauge, and the same night had
the condenser drilled to put it on. To my disgust no tap could be
found to fit its thread. So I had to drive a wooden plug in the hole.
The next day I called again at their store, nearly three miles from the
Champ de Mars, and told them of my predicament. With a profusion
of regrets for the inconvenience I had been put to, which he must
have known that I would be, the gentleman produced a set of taps,
and kindly loaned them to me, observing with evident pride that this
was “a thread peculiar to their house.” The Deluel gauge was put on
that night, and next morning I had the great satisfaction of seeing
that its reading agreed with that of the Bourdon gauge precisely.
I neglected to patent this condenser, so there was nothing to
connect me with it, and the next year coming home, where I had no
occasion for it, I quite lost sight of it. But at our Centennial Exhibition,
nine years after, I saw a large horizontal engine sent from Belgium
with the old familiar box behind the cylinder, and about twenty years
after that I had the pleasure of having the condenser described to
me, as if I were a stranger to it, by Mr. F. M. Wheeler, who mentioned
particularly the inclined bottom of the condensing chamber, the
feature by which the air was prevented from mingling with the water.
He informed me that it was a condenser then commonly used in
Europe, and was seen in all illustrations of horizontal condensing
engines. I have forgotten whether or not I told him what I knew about
the origin of this condenser.
At this exposition only the English had a building devoted to the
show of artillery. The principal features that I remember were the
Whitworth and the Armstrong systems, which were elaborately
represented. I used to say that the British lion here invited the other
beasts to examine his teeth.
The French and the English had each a large building on the bank
of the Seine devoted to naval exhibits. In the former I happened to
be present at a reception held by the young Prince Imperial, at which
he received the congratulations of, among others, many prominent
Englishmen, some of whom I recognized. How bright, then, seemed
his prospects! How sad his end! But how grand for France, her
return to a free republic; long may it live!
In the English naval exhibit three men made an exhibition of their
childish extravagance. Models were shown of a fleet of eight
vessels, each quite 10 feet long, completely and superbly finished
inside and out, and entitled “England’s Fleet of the Future.” The
vessels, full rigged, were built by Robert Napier. They were provided
with engines made by John Penn, and carried broadsides of
Whitworth guns. Recalled in the light of to-day, this costly show
appears supremely ridiculous. It did not present a single feature that
has not long since vanished and become almost forgotten. Both the
prince and the toys furnish a lesson to the moralist. How swiftly, as
by a cyclone, has all that each represented been swept away
forever! What is there, in governments or in mechanism, that shall
endure?
It was my good fortune one day in the latter building to meet
Admiral Farragut. I heard him say, respecting this proud fleet, “When
it is built, some Yankee will come with a torpedo and blow it out of
the water.” One other terse reply of the old hero which I then heard is
worthy to be recorded. He was asked his opinion of the monitor. “A
machine to drown a man in like a rat, sir,” was his answer.
About midsummer I received an application from the firm of
Ducommen et Cie. of Mulhouse, a city in the southern part of Alsace,
and an important manufacturing center, whose people also had no
foreboding of what was so soon to befall them, for a concession to
manufacture my engines in France. They had a large exhibit at the
exposition, and impressed me quite favorably. I consulted with Mr.
Hoyle and replied, deferring action until a later period of the
exposition. Some time in September, not having received any other
application, I accepted this one. There I made a mistake. Just before
the close of the exposition I received a very flattering letter from the
firm of Farcot et Cie., the most eminent stationary engine-builders in
France, and who showed the largest engine at the exposition. Their
works were near Paris, and on their invitation, in company with Mr.
Hoyle, I had visited them. They stated that, having observed closely
the performance of the engine through all these months, they had
become convinced of its excellent and durable qualities, and
solicited the right to manufacture the engine in France. I had to pay
the penalty for my premature action in explaining to them with deep
regret that this right was already disposed of. My regret was
deepened when, in the course of the following winter, I received in
Manchester copies of drawings according to which Ducommen et
Cie. proposed to construct the engines. The changes they had
made, all in the direction of complication, amazed me. It seemed to
have rained bolts and nuts. Every constructive requirement of a
successful high-speed engine was ignorantly sacrificed. After full
consultation Mr. Hoyle and I agreed that the case was hopeless, that
they would never do anything; and they never did. I have no
photographs of the Paris Exposition. It was a very singular thing that
none were taken there, so far as I ever heard.
Near the close of the exposition I had another visit from Mr. Allen.
He had been sent over by our associates to see for himself and to
report to them what I had really accomplished. He stayed with me a
little while after our return to Manchester. Mr. Whitworth treated us
with the greatest civility. On his invitation we rode out to his country
home and spent the day with him. This visit is worth recording. His
estate lay in Derbyshire, adjacent to Chatsworth, the well-known
seat of the Duke of Devonshire. It occupied a rather broad valley,
extending to the sky-line of high ranges of hills on each side, and
comprised three thousand acres. He told me that three adjoining
estates fell into the market, one after another, and he succeeded in
getting the whole of them. In the middle of this valley was a lower
isolated hill, containing stone quarries that had been worked from
time immemorial, and which, when he bought, were surrounded by
unsightly heaps of débris. Mr. Whitworth had closed the quarries,
covered these heaps with earth on which trees were then growing,
and transformed the whole into most picturesque ornamental
grounds. After lunch Mr. Whitworth took his cane and, with a step as
sprightly as a schoolboy’s, led us a tramp over this region. In the
quarries he had formed galleries at different elevations. Finally, at the
top of the hill, commanding views of his whole estate, he had leveled
a space about 100 by 200 feet and surrounded it with a rustic