Partnerships .ppt
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8
Partnership disadvantages
Formulation of partnership agreement
A new agreement is required each time a new partner joins or a partner withdraws
Personal relationships among partners may cause problems
No limit on the number of partners
4
Partnerships
Entity theory:
partners own their share of the partnership, but not its individual assets
Assets of the partnership are the joint property of all partners
Each partner has a claim to a share of the business profits
Dissociation:
partners can dissociate without dissolution
5
Partnerships
Partners have
Mutual agency
Cola invests land and building worth $10 and $40.
Crown invests cash and inventory at $7 and $35.
Agree to have equal shares:
(10 + 40 + 7 + 35) / 2 = $46 each
25,000
Inventory
70,000
Computer equipment
450,000
accounts payable
85,000
David, Capital
470,000
To record David’s investment in the partnership
15
Initial Investment-exercise
Partner initial investments, at fair value, may not represent their ownership.
Individual talent Business connections Customer base
If they choose to be equal partners, must choose accounting method:
Cash $5000; software market value $100,000
Prepare the partnership entries
14
Initial Investment-exercise
David’s investment:
Cash at bank
10,000
Accounts Receivable
noncash investments 4. Additional investment conditions 5. Asset withdrawals 6. Profit and loss sharing 7. Dissolution procedures
7
Partnership advantages
Crown’s capital account is recorded at more than the fair value of the assets contributed.
Is this fair?
19
Initial Investment with Goodwill
If Cola and Crown agreed to equal shares, we can use the larger contribution to determine an implied value of the firm:
Partners Creditors of the partnership Government – taxation authorities
Main difference between partnership reporting and sole proprietor is the need for more than one owners equity account
2
Байду номын сангаас
Objectives (cont.)
5. Value a partner's share upon retirement or death.
6. Understand limited liability partnership characteristics.
3
1: Characteristics of Partnerships
David:
Cash $10,000; inventory $70,000; Accounts Payable $85,000; Accounts Receivable $25,000; equipment $600,000 (current market value $450,000)
Joan:
Versus proprietorships:
Can raise more capital Combines expertise In a good partnership 1+1 > 2
Versus companies
Less expensive to organise No taxation of partnership income
Bonus method
Adjustment within the capital accounts
Goodwill method
Goodwill is recorded on the books
17
Initial Investment with Bonus
Total fair value received is split, as desired, between partners
Joan’s investment:
Cash at bank
5000
Computer software
100,000
Joan, Capital
105,000
To record Joan’s investment in the partnership
16
Initial Investment with Bonus or Goodwill
Partnerships pay no taxes
Partners pay tax individually on their share of the profits
6
Articles of Partnership
Written partnership agreement detailing: 1. Products or services, line of business 2. Partner rights & responsibilities 3. Initial investment and value assigned to
Either partner can bind the business to a contract so long as it is within regular business operations
Unlimited personal liability
Liability is for all of the partnership debts, not just partnership share
Partnerships – Formation, Operations, and Changes in Ownership Interests
A partnership is an association of 2 or more people carrying on business in common with a view to making a profit
Balance in capital account represents partner’s share of the partnership’s net assets
11
2: Initial Investment
Partnerships – Formation, Operations, and Changes in Ownership Interests
Advanced Accounting II
Topic: Partnerships
1
Partnerships: Objectives
1. Comprehend the legal characteristics of partnerships.
2. Understand initial investment valuation and record keeping.
Cash Inventory Land Building
Cola Capital Crown Capital
7 35 10 40
46 46
18
Initial Investment with Bonus
Cola’s capital account is recorded at less than the fair value of the assets contributed.
also need accounts to record profit share and withdrawals
10
Partnership Reporting
Capital account records:
Initial investment Subsequent capital contributions Profit or loss distributions Any withdrawals of capital
Cola’s contribution:10+40 = 50 Crown’s contribution: 7+35 = 42
If each partner share equals 50% of the firm then use Cola’s contribution to calculate an implied total value of (50x2) $100
Cash Equipment Land
Paul Capital
13
XXX XXX XXX
XXX
Initial Investment-exercise
David and Joan form a partnership to manufacture and sell computer software. They agree on the following values of their contributions:
Mutual agency and unlimited personal liability create personal obligations for each partner
9
Partnership Reporting
Financial reporting should provide for the needs of
3. Grasp the diverse nature of profit and loss sharing agreements and their computation.
4. Value a new partner's investment in an existing partnership.
12
Initial Investment
Cash Amy Capital
Cash Paul Capital
XXX XXX
XXX XXX
A partnership is started by Amy and Paul, each investing cash.
If they invest other assets, the value of those assets should be agreed upon in advance.
Partnership disadvantages
Formulation of partnership agreement
A new agreement is required each time a new partner joins or a partner withdraws
Personal relationships among partners may cause problems
No limit on the number of partners
4
Partnerships
Entity theory:
partners own their share of the partnership, but not its individual assets
Assets of the partnership are the joint property of all partners
Each partner has a claim to a share of the business profits
Dissociation:
partners can dissociate without dissolution
5
Partnerships
Partners have
Mutual agency
Cola invests land and building worth $10 and $40.
Crown invests cash and inventory at $7 and $35.
Agree to have equal shares:
(10 + 40 + 7 + 35) / 2 = $46 each
25,000
Inventory
70,000
Computer equipment
450,000
accounts payable
85,000
David, Capital
470,000
To record David’s investment in the partnership
15
Initial Investment-exercise
Partner initial investments, at fair value, may not represent their ownership.
Individual talent Business connections Customer base
If they choose to be equal partners, must choose accounting method:
Cash $5000; software market value $100,000
Prepare the partnership entries
14
Initial Investment-exercise
David’s investment:
Cash at bank
10,000
Accounts Receivable
noncash investments 4. Additional investment conditions 5. Asset withdrawals 6. Profit and loss sharing 7. Dissolution procedures
7
Partnership advantages
Crown’s capital account is recorded at more than the fair value of the assets contributed.
Is this fair?
19
Initial Investment with Goodwill
If Cola and Crown agreed to equal shares, we can use the larger contribution to determine an implied value of the firm:
Partners Creditors of the partnership Government – taxation authorities
Main difference between partnership reporting and sole proprietor is the need for more than one owners equity account
2
Байду номын сангаас
Objectives (cont.)
5. Value a partner's share upon retirement or death.
6. Understand limited liability partnership characteristics.
3
1: Characteristics of Partnerships
David:
Cash $10,000; inventory $70,000; Accounts Payable $85,000; Accounts Receivable $25,000; equipment $600,000 (current market value $450,000)
Joan:
Versus proprietorships:
Can raise more capital Combines expertise In a good partnership 1+1 > 2
Versus companies
Less expensive to organise No taxation of partnership income
Bonus method
Adjustment within the capital accounts
Goodwill method
Goodwill is recorded on the books
17
Initial Investment with Bonus
Total fair value received is split, as desired, between partners
Joan’s investment:
Cash at bank
5000
Computer software
100,000
Joan, Capital
105,000
To record Joan’s investment in the partnership
16
Initial Investment with Bonus or Goodwill
Partnerships pay no taxes
Partners pay tax individually on their share of the profits
6
Articles of Partnership
Written partnership agreement detailing: 1. Products or services, line of business 2. Partner rights & responsibilities 3. Initial investment and value assigned to
Either partner can bind the business to a contract so long as it is within regular business operations
Unlimited personal liability
Liability is for all of the partnership debts, not just partnership share
Partnerships – Formation, Operations, and Changes in Ownership Interests
A partnership is an association of 2 or more people carrying on business in common with a view to making a profit
Balance in capital account represents partner’s share of the partnership’s net assets
11
2: Initial Investment
Partnerships – Formation, Operations, and Changes in Ownership Interests
Advanced Accounting II
Topic: Partnerships
1
Partnerships: Objectives
1. Comprehend the legal characteristics of partnerships.
2. Understand initial investment valuation and record keeping.
Cash Inventory Land Building
Cola Capital Crown Capital
7 35 10 40
46 46
18
Initial Investment with Bonus
Cola’s capital account is recorded at less than the fair value of the assets contributed.
also need accounts to record profit share and withdrawals
10
Partnership Reporting
Capital account records:
Initial investment Subsequent capital contributions Profit or loss distributions Any withdrawals of capital
Cola’s contribution:10+40 = 50 Crown’s contribution: 7+35 = 42
If each partner share equals 50% of the firm then use Cola’s contribution to calculate an implied total value of (50x2) $100
Cash Equipment Land
Paul Capital
13
XXX XXX XXX
XXX
Initial Investment-exercise
David and Joan form a partnership to manufacture and sell computer software. They agree on the following values of their contributions:
Mutual agency and unlimited personal liability create personal obligations for each partner
9
Partnership Reporting
Financial reporting should provide for the needs of
3. Grasp the diverse nature of profit and loss sharing agreements and their computation.
4. Value a new partner's investment in an existing partnership.
12
Initial Investment
Cash Amy Capital
Cash Paul Capital
XXX XXX
XXX XXX
A partnership is started by Amy and Paul, each investing cash.
If they invest other assets, the value of those assets should be agreed upon in advance.