CHAPTER

14
Partnership
Accounting
LEARNING OBJECTIVES
When you have completed this chapter, you should
1. have a better understanding of accounting terminology.
2. understand the general characteristics of a partnership and the
importanceof each one.
3. be able to calculate the division of profits, prepare the proper journal
entries,and prepare the financial statements for a partnership.
4. be able to calculate and prepare the journal entries for the sale of a
partner-ship interest, the withdrawal of a partner, and the addition of a
partner.
5. be able to calculate and prepare the journal entries for a partnership
that isgoing out of business.

VOCABULARY
account form a balance sheet that shows assetson the left-handside and liabilities and
balance sheet owner’s equity on the right-hand side
deficit a deficiency in amount; i.e., in thischapter, a deficit balance in the
capitalaccount is an abnormal, or a debit, balance
liquidation to settle the accountsand distribute the assets of a business
mutual agency the legal ability of a partner to bind the partnership to contracts within
thescope of the partnership
partnership a voluntary association of two or more legally competent persons who
agree todo business asco-owners for profit
profit-lossratio the method chosen by partnersfor dividing the profits or losses; also called
theincome and losssharing ratio
realization the conversion of noncash assets to cash
unlimited liability each partner ispersonally liable for the business debts

Introduction
The three common types of business are the proprietorship, the corporation, and
the partnership. It is important to note that corporations, though fewer in number
than proprietorships or partnerships, transact at least 10 times the business of all
other busi- ness forms combined. There are advantages and disadvantages to each
type of business organization.
 Accounting for a partnership is similar to accounting for a proprietorship
except there is more than one owner.

General Partnership Characteristics

General partnerships and limited partnerships are recognized by Canadian law. In
this chapter, we will concentrate on general partnerships, which are governed by
provincial law and registration requirements, and which have certain characteristics.
Following is a discussion of each.

Voluntary Association
A partnership is a voluntary association of two or more legally competent persons
(per- sons who are of age and sound mental capacity) to carry on as co-owners a
business for profit. Because a partnership is based on agreement, no person can be
a partner against her or his will. Doctors, accountants, and lawyers frequently form
partnerships, and thisform of business organization is common in small service and
retail businesses.

Partnership Agreement
Two or more legally competent people may form a partnership. It is best if their
agree- ment is in writing, but it may be expressed verbally. The partnership contract
is prepared by a lawyer, though an acccountant may review it. The contract will
stipulate, among other things, how partnership income and losses are to be divided
among the partners.

Taxation
A partnership is taxed like a proprietorship. In other words, the partners are taxed
based upon the partnership’s net income, not on their withdrawals from the
business.

Limited Life
A partnership is a business carried on by individuals and can not exist separate and
apart from those individuals. Should something happen to take away the ability of
a partner to contract (death, bankruptcy or lack of legal capacity), the partnership
may be termi- nated. Also, the life of a partnership may be limited by terms in the
partnership contract, or it may be terminated by any one of the partners at will.

Mutual Agency
Mutual agency is the legal ability of each partner, acting as an agent of the
business, to enter into and bind it to contracts within the scope of the partnership.
For example, Alyce, Ben, and Charlie are partners in an accounting firm. Ben may
bind the partner- ship by contracting to buy a computer for the business, even if the
other two partners know nothing of the purchase. They are bound to the contract
because a computer is an expected and necessary piece of equipment for an
accounting firm. However, the firm would not be bound if Ben should contract to
buy land with the expectation that its value would increase because this transaction
is considered to be outside the purpose of an accounting business.
Partners may agree to limit the power of one or more of the partners to negotiate
con- tracts for the business. Outsiders are bound by this agreement only if they are
aware of it.

Unlimited Liability
Much like in a proprietorship, partners have unlimited liability for their business.
Unlimited liability means that each partner is personally liable for the debts of
the
 business. When a partnership business is unable to pay its debts, the creditors may
sat- isfy their claims from the personal assets of any of the partners. If any one
partner can not pay her or his share of the debt, creditors may make their claims
against any of theother partners.

Advantages and Disadvantages of a Partnership

A partnership has advantages over other forms of business. By combining the
abilitiesand capital of two or more persons, business potential may be greatly
expanded. Also, a partnership is much easier to form than a corporation because an
agreement between parties is all that is required. However, there are several
disadvantages—limited life, unlimited liability, and mutual agency are among these
and pose potential legal prob- lems that must be considered when forming any new
partnership.

The Drawing Account

Partnership accounting is the same as accounting for a proprietorship except there
are separate capital and drawing accounts for each partner. The fundamental
accountingequation (Assets = Liabilities + Owner’s Equity) remains unchanged
except that totalowners’ equity is the sum of the partners’ capital accounts. Similar
to a proprietorship, the partners (owners) do not receive salaries but withdraw
assets from the business for their personal needs. Generally, the rules for
withdrawals are decided beforehand by thepartnership agreement. For example,
assume that Partner Arnold withdraws $5,000from a partnership firm of which he
is a member. The journal entry to show this with- drawal is as follows:

GENERAL JOURNAL Page

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Jan. 15 Arnold, Drawing 5 0 0 0 00
Cash 5 0 0 0 00
To Record the Withdrawal of Cash

At the end of the accounting period, the drawing accounts of each partner are
closed to their individual capital accounts. Following is the journal entry to close
the drawingaccount of Partner Arnold to his capital account.

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DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Jan. 31 Arnold, Capital 5 0 0 0 00
Arnold, Drawing 5 0 0 0 00
To Record the Closing of Arnold’s Drawing
Account to Capital
 Accounting for a partnership requires calculations be made for the division of
prof- its and losses and the preparation of journal entries for the addition or
withdrawal of a partner. In addition, special problems must be solved when a
partnership is going out ofbusiness. Each of these will be discussed in the following
paragraphs.

Dividing the Net Income

Remember that partners are owners of the business, not employees, and as such,
may divide their net income as they choose. The partnership contract, however,
must state how the net income or loss is to be divided. If there is no contract, the
law states that profits and losses will be divided equally. The method chosen by the
partners for divid- ing the profits or losses is called the profit-loss ratio. This
chapter will discuss a num-ber of methods that may be used. Profits and losses:
1. may be divided equally
2. may be distributed on a fractional basis
3. may be distributed based on amounts invested
4. may be distributed using a fixed ratio
5. may be distributed using a salary allowance with any remaining profits
dividedequally or using a ratio

Dividing Net Income Equally

Partners may divide profits equally. For example, M. Saar, J. Loretto, and S. Abdullah
are partners. Saar invested $50,000 in cash and other assets, Loretto invested
$30,000 cash, and Abdullah invested $40,000 cash in their accounting firm. The
following balance sheet was prepared on December 31 before adjusting and closing
entries for the year had been prepared.

Saar, Loretto, and Abdullah, Accountants

Balance Sheet
December 31, 20XX
Assets
Cash $ 8 0 0 0 0 00
Other Assets 5 0 0 0 000
Total Assets $ 1 3 0 0 0 0 00

Liabilities
Accounts Payable $ 1 0 0 0 000

Owners’ Equity
Saar, Capital 5 0 0 0 000
Loretto, Capital 3 0 0 0 000
Abdullah, Capital 4 0 0 0 000 1 2 0 0 0 000
Total Liabilities and Owners’ Equity $ 1 3 0 0 0 0 00
 Revenues were $96,000 and expenses were $60,000, leaving $36,000 net income to
bedistributed to the three partners’ capital accounts. Once the amount to be allocated is
deter- mined, a closing entry crediting the capital accounts is required. If net
income is to be divided equally, the Income Summary account is closed to the capital
accounts as follows:

GENERAL JOURNAL Page

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DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Income Summary 3 6 0 0 0 00
Saar, Capital 1 2 0 0 000
Loretto, Capital 1 2 0 0 000
Abdullah, Capital 1 2 0 0 000
To Close Income Summary to Capital

Dividing Net Income Based on Amounts Invested

The partners may agree to divide net income using a fraction determined by using
the amounts of the original capital investment. The following shows the steps
involved in this calculation:
1. Determine the amounts originally invested.
Saar $ 50,000
Loretto 30,000
Abdullah 40,000
Total $120,000

2. Determine fractions. (The denominator is the total amount invested,

$120,000,and each partner’s individual investment becomes the
numerator.)

Profits to be Total
Ratio Divided Allocated
50,000 5
Saar = × $36,000 = $15,000
120,000 12
30,000 3
Loretto = × 36,000 = 9,000
120,000 12
40,000 4
Abdullah = × 36,000 = 12,000
120,000 12
Total to be allocated $36,000

The general journal entry to close the Income Summary to the capital accounts is
as follows:
 GENERAL JOURNAL Page
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DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Income Summary 3 6 0 0 0 00
Saar, Capital 1 5 0 0 000
Loretto, Capital 9 0 0 0 00
Abdullah, Capital 1 2 0 0 000
To Record the Closing of the Income
Summary to Capital

Dividing Net Income Using a Fixed Ratio

In the partnership agreement, the contract may specify a fixed ratio to be used to
dividethe profits or losses. For example, Saar, Loretto, and Abdullah decide to use
a ratio of 3:2:1, respectively. To use this ratio, convert the ratio into a fraction and
multiply it bythe net income or loss of the period. The steps for using the ratio to
divide the profit are as follows:
1. Determine the fraction from the ratio. Add: 3 + 2 + 1 = 6. Thus, 6 becomes
thedenominator of the fraction. The numerators are the numbers in the
ratio.
Saar 3/6 or 1/2
Loretto 2/6 or 1/3
Abdullah 1/6

2. Calculate the distribution amounts.

Profits to be Total
Fraction Divided Allocated
Saar 1/2 × $36,000 = $18,000
Loretto 1/3 × $36,000 = 12,000
Abdullah 1/6 × $36,000 = 6,000
Total $36,000

The general journal entry to close the Income Summary to the capital accounts is as
follows:

GENERAL JOURNAL Page

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Income Summary 3 6 0 0 0 00
Saar, Capital 1 8 0 0 000
Loretto, Capital 1 2 0 0 000
Abdullah, Capital 6 0 0 0 00
To Record the Closing of the Income
Summary to Capital
 Dividing Net Income by Paying Interest on
Investments and Salary Allowances
Another common way to divide profits is to pay interest on the original capital
invest- ments, give a salary allowance, and divide any remainder equally or
according to a fixed ratio. The following example assumes 5 percent (.05) interest
on the original invest- ment, salary allowances of $10,000 to each partner, and any
remainder to be divided equally. The following shows the calculations made to
determine the distribution.

Share to Share to Share to

Saar Loretto Abdullah Total
Total Amount to Be Divided $36,000
Allocated as Interest:
Saar (5% × $50,000) $ 2,500
Loretto (5%× $30,000) $ 1,500
Abdullah (5%× $40,000) $ 2,000
Total Interest – 6,000
Balance $30,000
Salary Allowances 10,000 10,000 10,000 –30,000
Totals to Each $12,500 $11,500 $12,000 0

There is no remainder to be divided in this instance. The following is the

journal entry to close the Income Summary to the capital accounts.

GENERAL JOURNAL Page

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DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Income Summary 3 6 0 0 0 00
Saar, Capital 1 2 5 0 000
Loretto, Capital 1 1 5 0 000
Abdullah, Capital 1 2 0 0 000
To Record the Closing of the Income
Summary to Capital

Now assume the same facts except that Saar will receive $10,000 salary allowance,
Loretto will receive $8,000, and Abdullah will receive $9,000. The remainder, if any,
will be divid-ed equally. The calculation to determine the distribution would then be
as follows:

Share to Share to Share to

Saar Loretto Abdullah Total
Total Amount to Be Divided $36,000
5% Interest $ 2,500 $ 1,500 $ 2,000 – 6,000
Balance $30,000
Salary Allowance 10,000 8,000 9,000 – 27,000
Balance 3,000
Remainder Divided by 3 1,000 1,000 1,000 – 3,000
Totals $13,500 $10,500 $12,000 0
 The general journal entry to close the Income Summary to the capital accounts is as
follows:

GENERAL JOURNAL Page

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Income Summary 3 6 0 0 0 00
Saar, Capital 1 3 5 0 000
Loretto, Capital 1 0 5 0 000
Abdullah, Capital 1 2 0 0 000
To Record the Closing of the Income
Summary to Capital

The methods illustrated thus far are used for calculating the proper allocation of
profitsto the partners. The use of the salary allowance method does not require the
partners towithdraw a certain amount as salary. The salary allowances are used
solely for calculat-ing the distribution of net income. The closing of the Income
Summary account to the capital accounts of the partners is the end result of the
method used to share profits or losses.

Partnership Financial Statements

The financial statements of a partnership business are similar to those of a
proprietor- ship. The income statement, statement of changes in partners’ equity
and the balancesheet follow. Assume that each partner has withdrawn $8,000
during the year.
 Saar, Loretto, and Abdullah, Accountants
Income Statement
For Year Ended December 31, 20XX
Professional Revenue $ 9 6 0 0 000
Operating Expenses 6 0 0 0 000
Net Income $ 3 6 0 0 000

Allocation of Net Income to the Partners:

Saar
Interest at 5% (.05 × $50,000) $ 2 5 0 000
Salary Allowance 1 0 0 0 000
1/3 of Remaining Net Income 1 0 0 000
Total $ 1 3 5 0 000

Loretto
Interest at 5% (.05 × $30,000) $ 1 5 0 000
Salary Allowance 8 0 0 000
1/3 of Remaining Net Income 1 0 0 000
Total $ 1 0 5 0 000

Abdullah
Interest at 5% (.05 × $40,000) $ 2 0 0 000
Salary Allowance 9 0 0 000
1/3 of Remaining Net Income 1 0 0 000
Total $ 1 2 0 0 000

Net Income Allowed $ 3 6 0 0 000

Saar, Loretto, and Abdullah, Accountants

Statement of Changes in Partners’ Equity
For Year Ended December 31, 20XX
Saar Loretto Abdullah Total
Capital, January 1 5 00 0 0 00 3 00 0 0 00 4 00 0 0 00 1 2 0 0 0 000
Add: Additional Invest. 0 00 0 00 0 00 0 00
Add: Net Income 1 35 0 0 00 1 05 0 0 00 1 20 0 0 00 3 6 0 0 0 00
Subtotals 6 35 0 0 00 4 05 0 0 00 5 20 0 0 00 1 5 6 0 0 000
Deduct: Withdrawals 8000 00 8 0 0 0 00 8 0 0 0 00 2 4 0 0 0 00
Capital, December 31 5 55 0 0 00 3 25 0 0 00 4 40 0 0 00 1 3 2 0 0 000
 Saar, Loretto, and Abdullah, Accountants
Balance Sheet
December 31, 20XX
Assets
Cash $ 9 2 0 0 0 00
Other Assets 5 0 0 0 000
Total Assets $ 1 4 2 0 0 0 00

Liabilities
Accounts Payable $ 1 0 0 0 000

Owners’ Equity
Saar, Capital $ 5 5 5 0 000
Loretto, Capital 3 2 5 0 000
Abdullah, Capital 4 4 0 0 000 1 3 2 0 0 000
Total Liabilities and Owner’s Equity $ 1 4 2 0 0 0 00

Accounting for a Deficit When Distributing Net Income

In the event the method used for distribution of net income results in a deficit
amount (negative) after interest and salary allowances, the deficit must be subtracted
in the calcu- lation rather than added. Assume for the partnership of Saar, Loretto, and
Abdullah that the method for distributing net income or loss is to calculate interest at
5 percent of the original investment, give salary allowances of $10,000, $8,000, and
$9,000, respectively, and divide any remainder equally. The following example will
show the use of this method when profits are $24,000. The calculation to determine
the distribution is as follows:

Share to Share to Share to

Saar Loretto Abdullah Total
Total Amount to Be Divided $24,000
5% Interest $ 2,500 $ 1,500 $ 2,000 – 6,000
Balance $18,000
Salary Allowance 10,000 8,000 9,000 – 27,000
Deficit Balance $(9,000)
Deficit Distributed (3,000) (3,000) (3,000) 9,000
Totals $ 9,500 $ 6,500 $ 8,000 0

The general journal entry to close the Income Summary to the capital accounts
willdebit income summary for $24,000 and credit the individual capital accounts.

Distributing a Net Loss

The above examples cover only net income. Should a loss occur, the procedure for
dis- tributing the loss to the partners’ capital accounts is the same as distributing net
income unless the partners agree otherwise. Losses will reduce both assets and
capital. Assuming that the partners share profits and losses equally, and assuming a
$36,000 loss, the clos- ing entry debits the individual partner’s capital accounts
$12,000 each and credits Income Summary for $36,000.
The Account Form Balance Sheet
An account form balance sheet shows the assets on the left-hand side and liabilities
and owner’s equity on the right-hand side. The account form balance sheet will be
used in this chapter to demonstrate changes in the balance sheet as they occur from
the with- drawal of a partner, the addition of a partner, or a partnership going out of
business. The report form balance sheet has been used in previous chapters.
Following are illustrations of various possibilities for changes in the composition of
the partnership.

Withdrawing or Adding a New Partner

A partnership is based on a contractual agreement among individuals and ends
when a partner withdraws from the firm or a new partner is added. The business,
however, may continue with a new partnership agreement. A partner may
withdraw by selling his or her interest or equity in cash or other assets. If all the
partners agree, a new partner may join the firm either by buying the interest of a
present partner, by contributing addi- tional assets equal to the equity he or she is
acquiring, or by investing either more or lessthan the equity he or she will receive.
The partnership agreement should outline the procedure governing a partner
who wishes to withdraw from the business. Withdrawal may occur when a partner
wants to retire or does not wish to continue under the present business
arrangements. For exam-ple, assume that Abdullah, with an equity of $40,000,
wants to retire. The partnershipcontract provides that an audit be performed which
includes having all assets appraisedto determine market value. In addition, a
determination must be made of all liabilitiesof the partnership. Should the audit
reveal that assets and liabilities are different than reflected on the books of the
partnership, adjustments are made to the record to deter- mine the true equities of
the partners. Once this is accomplished, the contract may pro-vide that assets be
distributed to the retiring partner if it does not jeopardize the future profitability of
the remaining partners.

Sale of Partnership Interest for More Than

Partner’s Equity
Assume that M. Saar wants to sell his interest to B. Knight. The balance sheet before
thissale is as follows:

Saar, Loretto, and Abdullah, Accountants

Balance Sheet
December 31, 20XX
Assets Liabilities and Owners’ Equity
Liabilities
Cash $ 5 0 0 0 000 Accounts Payable $ 1 0 0 0 000
Other Assets 8 0 0 0 000
Owners’ Equity
Saar, Capital $ 5 0 0 0 0 00
Loretto, Capital 3 0 0 0 000
Abdullah, Capital 4 0 0 0 000 1 2 0 0 0 0 00
Total Liabilities and
Total Assets $ 1 3 0 0 0 000 Owner’s Equity $ 1 3 0 0 0 000
 Knight has agreed to pay Saar $60,000 for his equity in the business. Loretto
and Abdullah agree to accept Knight as a partner. The general journal entry to
record the transfer is as follows:

GENERAL JOURNAL PAGE

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Aug. 31 Saar, Capital 5 0 0 0 0 00
Knight, Capital 5 0 0 0 0 00
To Record the Transfer of Saar’s Equity
in the Partnership to Knight

After this entry, the old partnership is ended and a new partnership is formed. The
only change in the balance sheet will be the substitution of Knight for Saar. After
the new partnership is formed, a new contract is written.
Two points should be noted. First, the $60,000 Knight paid Saar was a personal
transaction between the two and does not affect the partnership records. The
$50,000 equity of Saar is transferred to Knight with the approval of the other two
partners. Remember, the business entity concept requires that personal transactions
be kept sep- arate from business transactions. The second point to note is that
Loretto and Abdullah must agree to have Knight as a partner since a partnership is
based on agreement of all parties.

Partner Admitted with Investment Same as Equity

Assume that Knight is to invest $40,000 in cash to receive a one-fourth interest in
the partnership. The following shows the equity of the present owners:
Saar $ 50,000
Loretto 30,000
Abdullah 40,000
Total $120,000

After Knight’s investment of $40,000, the total equity is $160,000. One-fourth of

$160,000 is $40,000, the equity of the new partner. The journal entry to illustrate
the addition of Knight under this assumption is as follows:

GENERAL JOURNAL PAGE

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Aug. 31 Cash 4 0 0 0 0 00
Knight, Capital 4 0 0 0 0 00
To Record the Addition of Knight as a
Partner with a One-Fourth Interest
 After the entry is posted, the assets and equities of the new partnership will appear
as follows:

Saar, Loretto, and Abdullah, Accountants

Balance Sheet
December 31, 20XX
Assets Liabilities and Owners’ Equity
Liabilities
Cash $ 9 0 0 0 0 00 Accounts Payable $ 1 0 0 0 000
Other Assets 8 0 0 0 0 00
Owners’ Equity
Saar, Capital $ 5 0 0 0 0 00
Loretto, Capital 3 0 0 0 000
Abdullah, Capital 4 0 0 0 000
Knight, Capital 4 0 0 0 000 1 6 0 0 0 0 00
Total Liabilities and
Total Assets $ 1 7 0 0 0 0 00 Owner’s Equity $ 1 7 0 0 0 000

Withdrawal of a Partner
Assume that Abdullah wants to retire and will accept cash equal to her equity.
Assume further that assets and liabilities are the same as presented on the balance
sheet on page386 and that the withdrawal of cash by Abdullah will not jeopardize the
firm’s cash posi- tion. The general journal entry to record the withdrawal of
Abdullah is as follows.

GENERAL JOURNAL PAGE

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Aug. 31 Abdullah, Capital 4 0 0 0 0 00
Cash 4 0 0 0 0 00
To Record the Withdrawal of Rose who
Receives Cash Equal to Her Equity

Sometimes when a partner retires, the remaining partners may not wish to give an
amount equal to the retiring partner’s equity. The retiring partner may then agree
to take an amount less than the value of his or her capital account. If this is the
situation, the profit-loss sharing ratio is used to adjust the capital accounts of the
remaining part-ners. Assume that the profits and losses are to be divided equally, and
Abdullah agrees to take $30,000 in cash for her $40,000 equity. The entry to show
the withdrawal of Abdullah for $30,000 cash is as follows:
 GENERAL JOURNAL Page
POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Aug. 31 Abdullah, Capital 4 0 0 0 0 00
Cash 3 0 0 0 0 00
Saar, Capital 5 0 0 000
Loretto, Capital 5 0 0 000
To Record the Withdrawal of Abdullah who
Receives Cash Less Than Her Equity

Bonus to Old Partners

A new partner may be expected to invest more assets than the equity he or she is to
receive. This might occur because the equities of the present partners may not reflect
the true worth of an already successful business. If this is the case, the partnership
is worth more than the records indicate. For example, assume that the present
equities are the same as previously indicated and that Knight is to invest cash of
$36,000 for a one-fifth interest. The amount to be credited to Knight’s capital
account for a 1/5 interest is deter- mined as follows:
Equities of the present partners $120,000
Investment of the new partner 36,000
Total equities of the new partnership 156,000
Equity of Knight (1/5 × $156,000 = $31,200) $ 31,200

Providing the present partners share equally, the bonus of $4,800 (the difference
between the cash given, $36,000, and the equity received, $31,200) will be divided
by 3and the capital accounts of the present partners will each be increased by
$1,600. Thefollowing is the journal entry to admit Knight as one-fifth partner.

GENERAL JOURNAL Page

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DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Aug. 31 Cash 3 6 0 0 0 00
Saar, Capital 1 6 0 000
Loretto, Capital 1 6 0 000
Abdullah, Capital 1 6 0 000
Knight, Capital 3 1 2 0 0 00
To Record the Addition of Knight as
Partner with a One-Fifth Interest
 After the entry is posted, the assets, liabilities, and owners’ equity are as follows:

Saar, Loretto, and Abdullah, Accountants

Balance Sheet
December 31, 20XX
Assets Liabilities and Owners’ Equity
Liabilities
Cash $ 8 6 0 0 0 00 Accounts Payable $ 1 0 0 0 000
Other Assets 8 0 0 0 0 00
Owners’ Equity
Saar, Capital $ 5 1 6 0 0 00
Loretto, Capital 3 1 6 0 000
Abdullah, Capital 4 1 6 0 000
Knight, Capital 3 1 2 0 000 1 5 6 0 0 0 00
Total Liabilities and
Total Assets $ 1 6 6 0 0 0 00 Owner’s Equity $ 1 6 6 0 0 000

Bonus to New Partner

A bonus may be given to a new partner when the new partner is given more equity
than his or her current capital balance. Assume that Knight invests $20,000 for a
one-fourth interest. The equity given to Knight in this case is greater than his
equity. Thus Saar, Loretto, and Abdullah, who share net income and losses equally,
must give up an equal-portion of their equity to Knight as determined below.
Equities of the present partners $120,000
Add investment of new partner 20,000
Total equities of the new partnership 140,000
Equity of Knight (1/4 × $140,000 = $35,000) $ 35,000

There is $15,000 difference between the $20,000 cash investment of Knight and
total equity of $35,000 he received. The $15,000 is a bonus to Knight. However, the
difference must be shared by the present partners as a reduction in their capital
accounts. The reduction in the capital accounts is $5,000 each. The entry to record
the addition of Knight under these circumstances is as follows.

GENERAL JOURNAL Page

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Aug. 31 Cash 2 0 0 0 0 00
Saar, Capital 5 0 0 000
Loretto, Capital 5 0 0 000
Abdullah, Capital 5 0 0 000
Knight, Capital 3 5 0 0 0 00
To Record the Addition of Knight as a
Partner with a One-Fourth Interest
 After the entry is posted, the assets, liabilities, and owners’ equity appear as follows.

Saar, Loretto, and Abdullah, Accountants

Balance Sheet
December 31, 20XX
Assets Liabilities and Owners’ Equity
Liabilities
Cash $ 7 0 0 0 000 Accounts Payable $ 1 0 0 0 000
Other Assets 8 0 0 0 000
Owners’ Equity
Saar, Capital $ 4 5 0 0 0 00
Loretto, Capital 2 5 0 0 000
Abdullah, Capital 3 5 0 0 000
Knight, Capital 3 5 0 0 000 1 4 0 0 0 0 00
Total Liabilities and
Total Assets $ 1 5 0 0 0 000 Owner’s Equity $ 1 5 0 0 0 000

This type of situation might occur when a new partner has a special talent or
busi- ness skill that will increase the profitability of the firm. However, there are
times when a bonus is not recorded at all. Rather, goodwill is recorded and the old
partners’ capital accounts are increased. This method is seldom used; the bonus
method is the preferred method.
In the event the two remaining partners are eager to see Abdullah retire, they may
abe willing to give more than Abdullah’s equity. Assume that they agree to give
Abdullah
$40,000 in cash and a note payable for $10,000 for her $40,000 equity. The entry
to record this situation is as follows:

GENERAL JOURNAL Page

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DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Aug. 31 Abdullah, Capital 4 0 0 0 0 00
Saar, Capital 5 0 0 000
Loretto, Capital 5 0 0 000
Cash 4 0 0 0 000
Notes Payable 1 0 0 0 000
To Record the Withdrawal of Abdullah
Who Receives Cash and a Note Payable
for Her Equity

The remaining partners share the additional equity given to Abdullah as a loss to
them- selves. Many other variations similar to these can be used. However, whatever
method isused, assets must equal liabilities and owners’ equity at all times.
Going Out of Business—Liquidation
Partners may determine that it is no longer possible to continue in business. This
may occur if the partners have unsettled disputes or the business is no longer
profitable and liquidation becomes necessary.Liquidation is the total process of
going out of business, or the legal process of converting assets to cash, paying all
creditors, and making final distribution of cash to the partners. This legal process
also means that each partner is liable to pay the creditors whether or not there is
sufficient cash remaining. Although many different circumstances occur in
liquidation, only two are discussed here. In each case, there are four steps to be
followed.
1. Convert all noncash assets to cash and record the gain or loss on liquidation.
2. Distribute the gains or losses to the partners’ capital accounts according to
theprofit-loss ratio.
3. Pay the liabilities.
4. Distribute the remaining cash according to the equities (capital balances) of
thepartners.
A temporary account called Loss or Gain from Liquidation is opened to assemble
the gains or losses that may occur when selling the assets. It is credited for a gain and
debited for a loss. The conversion of noncash assets to cash is called realization.
Partners will nor- mally share losses and gains from liquidation using their income
and loss sharing ratio.

Assets Sold for a Gain

The liquidation of a partnership may be illustrated using the following information.
Saar, Loretto, and Abdullah, the partners in the accounting firm in previous
illustrations, have had a bitter dispute over business policies. They decide to
dissolve the partnership. To illustrate a liquidation where assets are sold for a gain,
assume the following balance sheet before liquidation.

Saar, Loretto, and Abdullah, Accountants

Balance Sheet
December 31, 20XX
Assets Liabilities and Owners’ Equity
Liabilities
Cash $ 3 0 0 0 000 Accounts Payable $ 1 0 0 0 000
Other Assets 1 0 0 0 0 0 00
Owners’ Equity
Saar, Capital $ 5 0 0 0 0 00
Loretto, Capital 3 0 0 0 000
Abdullah, Capital 4 0 0 0 000 1 2 0 0 0 0 00
Total Liabilities and
Total Assets $ 1 3 0 0 0 000 Owner’s Equity $ 1 3 0 0 0 000

Assume that the other assets are sold for $109,000 and the partners share profits
and losses equally. The four steps necessary upon liquidation are shown as journal
entries.
 1. Convert all noncash assets to cash and record the gain or loss on liquidation.

GENERAL JOURNAL PAGE

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Cash 1 0 9 0 0 0 00
Other Assets 1 0 0 0 0 000
Loss or Gain on Realization 9 0 0 000
To Record the Sale of Other Assets

2. Distribute gains or losses to the partners’ capital accounts according to the

profit-loss ratio.

GENERAL JOURNAL Page

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Loss or Gain on Realization 9 0 0 0 00
Saar, Capital 3 0 0 000
Loretto, Capital 3 0 0 000
Abdullah, Capital 3 0 0 000
To Record the Closing of the Loss or Gain
on Realization Account to the Partners’
Capital Accounts

After posting these two entries, the balance sheet appears as follows.
Saar, Loretto, and Abdullah, Accountants
Balance Sheet
December 31, 20XX
Assets Liabilities and Owners’ Equity
Liabilities
Cash $ 1 3 9 0 0 000 Accounts Payable $ 1 0 0 0 000

Owners’ Equity
Saar, Capital $ 5 3 0 0 0 00
Loretto, Capital 3 3 0 0 000
Abdullah, Capital 4 3 0 0 000 1 2 9 0 0 0 00
Total Liabilities and
Total Assets $ 1 3 9 0 0 000 Owner’s Equity $ 1 3 9 0 0 000
 3. Pay the liabilities.

GENERAL JOURNAL PAGE

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Accounts Payable 1 0 0 0 0 00
Cash 1 0 0 0 0 00
To Record Payment to the Creditors

4. Distribute the remaining cash according to the equities of the partners.

GENERAL JOURNAL Page

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Saar, Capital 5 3 0 0 000
Loretto, Capital 3 3 0 0 000
Abdullah, Capital 4 3 0 0 000
Cash 1 2 9 0 0 0 00
To Record the Closing of the Partnership
Books

Once the above entries are posted, every account in the partnership records will
have a zero balance, signifying the termination of this business.
It is important to remember that cash remaining after liquidation is distributed
to partners according to their capital balances while gains and losses from
liquidation areallocated according to the income and loss sharing ratio.

Assets Sold for a Loss

Many times a business cannot sell its other assets at the amount carried in the records.
Assets will deteriorate with age and therefore are not as marketable as when they
were new. Assume that other assets are listed on the balance sheet at $100,000 and
that they are sold for $91,000. This is a $9,000 loss to the partners and will result in
reducing both their assets and capital accounts. Each of the four steps are presented
as journal entries as follows.
1. Convert all noncash assets to cash and record the gain or loss on liquidation.

GENERAL JOURNAL PAGE

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Cash 9 1 0 0 0 00
Loss or Gain on Realization 9 0 0 0 00
Other Assets 1 0 0 0 0 0 00
To Record the Sale of Other Assets
 2. Distribute the gains or losses to the partners’ capital accounts according to
theprofit-loss ratio.

GENERAL JOURNAL Page

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Saar, Capital 3 0 0 000
Loretto, Capital 3 0 0 000
Abdullah, Capital 3 0 0 000
Loss or Gain on Realization 9 0 0 0 00
To Record the Closing of the Loss to
Partners’ Capital Accounts

3. Pay the liabilities.

GENERAL JOURNAL PAGE

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Accounts Payable 1 0 0 0 0 00
Cash 1 0 0 0 0 00
To Record the Payment of the Creditors

After the above entries are posted, the T-accounts will appear as follows:

Cash Other Assets Accounts Payable

30,000 10,000 100,000 100,000 10,000 10,000
91,000
111,000

Saar, Capital Loretto, Capital Abdullah, Capital

3,000 50,000 3,000 30,000 3,000 40,000
47,000 27,000 37,000

Loss or Gain
on Realization
9,000 9,000

There is $111,000 left in the Cash account, and the total remaining capital account
bal-ances equal $111,000. In step four, the amount of cash to be distributed to each
partner is determined by the balance in each partner’s capital account.

4. Distribute the remaining cash according to the equities of the partners.

 GENERAL JOURNAL Page
POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Saar, Capital 4 7 0 0 000
Loretto, Capital 2 7 0 0 000
Abdullah, Capital 3 7 0 0 000
Cash 1 1 1 0 0 0 00
To Record the Closing of the Partnership
Books

After this entry is posted, all the accounts have a zero balance and the partnership is
ter- minated.
A problem may occur if one partner’s share of the loss is greater than the
balance of his or her capital account. If this is the case, the partner must cover the
deficit by paying cash into the partnership. In this situation, a deficit is a debit
balance in a partner’s cap- ital account. This could occur from liquidation losses,
losses from previous periods, or withdrawals before liquidation. For example,
assume the partners Saar, Loretto, and Abdullah share profits and losses in a
2:2:1 ratio. If the other assets are shown at
$100,000 on the balance sheet and sold for $20,000, a loss of $80,000 must be
distrib- uted. The four steps, presented as journal entries, will illustrate this
problem and are as follows.
1. Convert all assets to cash.

GENERAL JOURNAL PAGE

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Cash 2 0 0 0 000
Loss or Gain on Realization 8 0 0 0 000
Other Assets 1 0 0 0 0 0 00
To Record the Sale of the Other Assets

2. Distribute the gains or losses to the partners’ capital accounts according to

theprofit-loss ratio.
 GENERAL JOURNAL Page
POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Saar, Capital * 3 2 0 0 000
Loretto, Capital 3 2 0 0 000
Abdullah, Capital 1 6 0 0 000
Loss or Gain on Realization 8 0 0 0 0 00
To Record the Closing of the Loss to the
Partners’ Capital Accounts on a 2:2:1 Ratio

*Calculation of division of loss:

Saar 2/5 × $80,000 = $32,000
Bagwell 2/5 × $80,000 =
32,000Abdullah 1/5 ×
$80,000 = 16,000

3. Pay the creditors.

GENERAL JOURNAL PAGE

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Accounts Payable 1 0 0 0 0 00
Cash 1 0 0 0 0 00
To Record the Payment of the Creditors

After the above entries are posted, the T accounts will appear as follows:

Cash Other Assets Accounts Payable

30,000 10,000 100,000 100,000 10,000 10,000
20,000
40,000

Saar, Capital Loretto, Capital Abdullah, Capital

32,000 50,000 32,000 30,000 16,000 40,000
18,000 2,000 24,000

Loss or
Gain on
Realizatio
n
80,000 80,000

Loretto has a debit balance of $2,000 in his capital account and is liable to the
partner- ship for his deficit. If Loretto has sufficient personal assets and contributes
$2,000 to thefirm to cover his debit balance, step four can be completed as follows:
4. Distribute the remaining cash according to the equities of the partners.
a. Payment of cash by Loretto.
 GENERAL JOURNAL PAGE
POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Cash 2 0 0 0 00
Loretto, Capital 2 0 0 0 00
To Record the Cash Contribution of Loretto
to Cover His Liability

b. Distribute remaining cash.

GENERAL JOURNAL Page

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Saar, Capital 1 8 0 0 000
Abdullah, Capital 2 4 0 0 000
Cash 4 2 0 0 0 00
To Record the Closing of the Partnership
Books

After posting these two entries, all the accounts have a zero balance and the
partnership is terminated. However, if Loretto has no personal assets and cannot
pay his debt, because of unlimited liability Saar and Abdullah must share this
additional loss accord- ing to their portion of the profit-loss ratio, without Loretto,
which is 2:1. The journal entries for step four under these circumstances are as
follows.
4. Distribute the remaining cash according to the equities of the partners.
a. Distribute the $2,000 loss.

GENERAL JOURNAL Page

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Saar, Capital * 1 3 3 3 00
Abdullah, Capital 6 6 7 00
Loretto, Capital 2 0 0 0 00
To Record Loretto’s Liability as a Loss to
the Remaining Partners

*Calculation of division of
loss:
Saar 2/3 × $2,000 =
$1,333
Abdullah 1/3 × $2,000 = 667
 b. Distribute the remaining cash.

GENERAL JOURNAL Page

POST
DATE DESCRIPTION REF. DEBIT CREDIT
20XX
Dec. 31 Saar, Capital 1 6 6 6 700
Abdullah, Capital 2 3 3 3 300
Cash 4 0 0 0 0 00
To Record the Closing of the Partnership
Books

After posting of the above entries, all the accounts have a zero balance and the
partner-ship is terminated.
Even though the partner with the deficit cannot pay at the present time, the
liabilityis not eliminated. If the deficit partner becomes able to pay at some time in
the future, he or she must do so.

Summary
A partnership is a voluntary association of two or more legally competent persons to
carry on as co-owners a business for profit. It is best if they have a written partnership
agreement, but their contract may be a verbal one. Partnerships are characterized by
limited life, which means that the partnership cannot exist separate from the individual
partners, thus it may end when one partner becomes unable, through death, bankrupt-
cy or lack of legal capacity, to contract. Partners, through mutual agency, have the legal
ability to enter into contracts within the scope of the partnership. Such contracts are
binding on the other partners. Unlimited liability, which also characterizes partnerships,
refers to the fact that each partner is personally liable for the debts of the business.
Though there are many advantages to forming a partnership, limited life, unlimited lia-
bility, and mutual agency are disadvantages that should be considered before forming a
new partnership.
Partnership accounting is the same as proprietorship accounting, except that each
partner has his or her own drawing account. Partners are owners of the business and do
not receive salaries; rather, their drawing accounts are debited when cash is taken for per-
sonal use and income taxes are based on their share of the net income of the business.
Partners will decide upon a profit-loss ratio which will be used to determine how
profits and losses are to be allocated. Profits and losses may be distributed: (1) equally;
(2) on a fractional basis; (3) based on amounts invested; or (4) using a fixed ratio.
Should there be a loss, it will be distributed to the partners’ capital accounts the same
way as a net income unless there is an agreement to the contrary.
A new partnership may be created when a new individual buys the interest of one of
the existing partners, or if an additional person is admitted as a partner. In such a case,
the old partnership is dissolved. In addition to adding a new partner, an existing partner
may wish to withdraw from the partnership. In such a case, the value of all assets and
liabilities of the partnership must be determined by an audit.
 Partners may decide, because, for example, of unsettled disputes or lack of prof-
itability, to liquidate. When this occurs: (1) all noncash assets must be converted to cash
(called realization) and the gain or loss on liquidation recorded; (2) gains or losses must
be distributed to the partners’ capital accounts according to their profit-loss ratio; (3)
liabilities must be paid; and (4) any remaining cash must be distributed to the partners
according to their capital balances. Partners normally share gains and losses from liqui-
dation according to their profit-loss sharing ratio.

Vocabulary Review
Here is a list of the words and terms for this
chapter:account form balance sheet
partnershi
p deficit profit-loss
ratio
liquidation realization
mutual agency unlimited liability
Fill in the blank with the correct word or term from the list.
1. The total process of going out of business is .
2. A/an is an association of two or more competent persons who
agreeto do business as co-owners for profit.
3. The ability of each partner, acting as an agent of the business, to enter into
andbind it to contracts within the apparent scope of the business is .
4. is the conversion of noncash assets to cash.
5. The method used by the partners to divide profits or losses in the .
6. A/an is an abnormal balance in a capital account.
7. The principle that each partner is personally liable for the debts of the
business iscalled .
8. shows the three major categories—assets, liabilities, and
owner’sequity—in a horizontal manner.
 Match the words and terms on the left with the definitions on the right.
9. account form balance sheet a. the method used by the partners to divide
10. deficit profits or losses
11. liquidation b. each partner is personally liable for the debts
of the business
12. mutual agency
c. an association of two or more competent
13. partnership
persons who agree to do business as
14. profit-loss ratio co-owners for profit
15. realization d. an abnormal balance in a capital account
16. unlimited liability e. the conversion of noncash assets to cash
f. the total proces of going out of business
g. the ability of each partner, acting as an agent
of the business, to enter into and bind it to
contracts within the apparent scope of the
partnership
h. the format of a balance sheet that shows the
assets, liabilities, and owners’ equity in a
horizontal manner

Exercises
EXERCISE 14.1
Morton and Long plan to enter into a law partnership, investing $30,000 and
$20,000, respectively. They have agreed on everything but how to divide the
profits. Calculate each partner’s share of the profit under each of the following
independent assumptions.
a. If the first year’s net income is $50,000 and they cannot agree, how should
theprofits be divided?
b. If the partners agree to share net income according to their investment ratio,
howshould the $50,000 be divided?
c. If the owners agree to share net income by granting 10 percent interest on
their original investments, giving salary allowances of $10,000 each, and
dividing theremainder equally, how should the $50,000 be divided?

EXERCISE 14.2
Assume Morton and Long from Exercise 14.1 use method c to divide profits and
net income is $20,000. How should the income be divided?

EXERCISE 14.3
After a number of years, Long, from Exercise 14.1, decided to go with a large law
firmand wishes to sell his interest to Brown. Long’s equity at this time is $35,000.
Morton agrees to take Brown as a partner, and Long sells his interest to Brown for
$40,000. Prepare the general journal entry on December 31, 20XX to record the
sale of Long’s interest to Brown.
EXERCISE 14.4
Smith, White, and Saint are partners owning the Book Nook. The equities of the
part- ners are $60,000, $50,000, and $40,000, respectively. They share profits and
losses equal-ly. White wishes to retire on May 31, 20XX. Prepare the general journal
entries to record White’s retirement under each independent assumption.
a. White is paid $50,000 in partnership cash.
b. White is paid $40,000 in partnership cash.
c. White is paid $55,000 in partnership cash.

EXERCISE 14.5
Hall and Mason share profits and losses equally and have capital balances of $60,000 and
$40,000, respectively. Taylor is to be admitted on January 2, 20XX, and is to
receive a one-third interest in the firm. Prepare the general journal entries to record
the addition of Taylor as a partner under the following unrelated circumstances.
a. Taylor invests $50,000.
b. Taylor invests $62,000.
c. Taylor invests $47,000.

EXERCISE 14.6
Martin, Pearson, and Henderson are partners sharing profits and losses in a 2:1:1
ratio. Their capital balances are $30,000, $25,000, and $20,000, respectively. Because
of an eco-nomic turndown, they have decided to liquidate. After all assets are sold
and the credi- tors paid, $43,000 cash remains in the business chequing account.
a. Determine the amount of their losses by using the accounting equation.
b. Using the profit-loss ratio, determine the amount of loss to be distributed to
eachpartner, and determine their new capital balances.
c. Determine the amount of cash each partner will receive in the final distribution.

EXERCISE 14.7
Baker, Marshall, and Perryman share profits and losses equally and begin their
business with investments of $20,000, $15,000, and $8,000, respectively. They have
been unprof- itable in their business venture and decide they must liquidate. After
all the assets are sold and all debts paid, $16,000 cash remains in the business
chequing account.
a. Determine the amount of their losses by using the accounting equation.
b. Using the profit-loss ratio, determine the amount of loss allocated to each
partner, and determine their new capital balances.
c. Calculate the amount of cash, if any, each partner will receive under the
differentassumptions below.
(1) Perryman has personal assets and pays the amount she owes to
thepartnership.
(2) Perryman has no personal assets and does not pay the amount she owes to
thepartnership.
Problems
PROBLEM 14.1
Jones, Brady, and Bell formed a partnership making investments of $40,000,
$60,000, and $80,000, respectively. They believe the net income from their
business for the first year will be $81,000. They are considering several alternative
methods for sharing this expected profit, which are: (1) divide the profits equally;
(2) divide the profits according to their investment ratio; (3) divide the profits by
giving an interest allowance of 10 per- cent on original investments, granting
$10,000 salary allowance to each partner, and dividing any remainder equally.
Round to the nearest dollar where required.

In st r u ct i on s
a. Prepare a schedule showing distribution of net income under methods 1, 2, and 3.
It should have the following headings.
Share to Share to Share to Total
Plan Calculations Jones Brady Bell Allocated

b. Using method 3 above, prepare a partial income statement showing the allocation
of net income to the partners (see income statement on page 384 for example).
c. Journalize the closing of the Income Summary account on December 31, 20XX
using the information from b above.

PROBLEM 14.2
Abner, Black, and Cobb share profits and losses equally and have capital balances of
$60,000, $50,000, and $50,000, respectively. Cobb wishes to sell his interest and leave
thebusiness on July 31 of this year. Cobb is to sell his interest to Williams with the
approvalof Abner and Black.
In st r u ct i on s
Prepare the general journal entries, without explanations, to record the following
independent assumptions.
a. Cobb sells his interest to Williams for $50,000.
b. Cobb sells his interest to Williams for $40,000.
c. Cobb decides to stay in the partnership but sell one-half of his interest to Williams
for $30,000. (Hint: What is the value of half of Cobb’s capital account?)
d. If Williams is admitted as a new partner, must a new partnership agreement be
written? Why?
PROBLEM 14.3
Coleman and Simmons are partners and own the ABC Gift Shop. They formed
their partnership on January 2, 20XX, with investments of $50,000 and $25,000.
Simmons invested an additional $5,000 on July 7. They share profits giving 10
percent interest allowance on beginning investments and dividing the remainder on
a 2:1 ratio. Following is their trial balance before closing.
 Coleman and Simmons
Trial Balance
December 31, 20XX
Cash $ 1 9 0 0 000
Accounts Receivable 5 0 0 0 00
Merchandise Inventory 6 0 0 0 000
Equipment 2 0 0 0 000
Accumulated Amortization: Equipment $ 1 0 0 0 0 00
Accounts Payable 1 0 0 0 0 00
Coleman, Drawing 1 0 0 0 000
Simmons, Drawing 1 0 0 0 000
Coleman, Capital 5 0 0 0 0 00
Simmons, Capital 3 0 0 0 0 00
Sales 1 0 0 0 0 0 00
Operating Expenses 7 6 0 0 000
$ 2 0 0 0 0 000 $ 2 0 0 0 0 0 00

a. Prepare the general journal entries, without explanations, to record the

closing ofall the nominal accounts (revenue and expense) using the Income
Summary account.
b. Prepare a schedule showing the distribution of net income to the
partners. Itshould have the following headings.
Share to Share to Total
Calculations Coleman Simmons Allocated

c. Prepare the general journal entries to record the closing of the Income
Summaryaccount to the capital accounts, and close the drawing accounts to
the capital accounts.
d. Prepare the partnership income statement showing the allocation of net income.
e. Prepare the statement of owners’ equity.
f. Prepare a balance sheet.

PROBLEM 14.4
Arnold, Cole, and Yamaguchi are partners, owning Pizza Plus and sharing profits
and losses in a 3:2:1 ratio. The balance sheet, presented in account form format for
this busi- ness, is as follows.
 Arnold, Cole, and Yamaguchi
Balance Sheet
June 30, 20XX
Assets Liabilities and Owners’ Equity
Cash $ 6 5 0 0 0 00 Liabilities
Delivery Truck #1 2 5 0 0 0 00 Accounts Payable $ 3 0 0 000
Acc. Amort. Tr. #1 1 0 0 0 0 00 1 5 0 0 000
Delivery Truck #2 3 5 0 0 0 00 Owners’ Equity
Acc. Amort. Tr. #2 7 0 0 0 00 2 8 0 0 000 Arnold, Capital 6 0 0 0 0 00
Cole, Capital 3 0 0 0 0 00
Yamaguchi, Capital 1 5 0 0 0 00 1 0 5 0 0 000

Total Liabilities and

Total Assets $ 1 0 8 0 0 0 00 Owner’s Equity $ 1 0 8 0 0 0 00

Arnold wishes to withdraw from the firm. Cole and Yamaguchi agree.
Prepare the general journal entries, without explanations, to record the June 30 with-
drawal of Arnold under the following independent assumptions.
a. Arnold withdraws taking partnership cash of $60,000.
b. Arnold withdraws taking cash of $32,000 and truck #2 (debit
AccumulatedAmortization and credit Truck).
c. Arnold withdraws taking cash of $51,000
d. Arnold withdraws taking cash of $25,000 and a $44,000 note given by the
partner-ship.
e. Arnold withdraws taking cash of $25,000, a $20,000 note, and truck #1.

PROBLEM 14.5
Garcia, Keller, and Henley are partners who share profits and losses in a 3:1:2 ratio. Their
capital account balances are $60,000, $25,000, and $35,000, respectively. Watts is to be
admitted to the firm on March 31, 20XX with a one-fourth interest.
In st r u ct i on s
Prepare the general journal entries to record the following unrelated assumptions.
Omit explanations.
a. Watts is to be admitted by investing cash of $40,000.
b. Watts is to be admitted by investing cash of $30,000.
c. Watts is to be admitted by investing cash of $50,000.

PROBLEM 14.6
Bentley, Colby, and Musharaf plan to liquidate their partnership. They share profits
and losses on a 3:2:1 ratio. At the time of liquidation, the partnership balance sheet
appearsas follows:
 Bentley, Colby, and Musharaf
Balance Sheet
June 30, 20XX
Assets Liabilities and Owners’ Equity
Liabilities
Cash $ 2 3 0 0 000 Accounts Payable $ 3 0 0 0 000
Other Assets 1 1 5 0 0 0 00
Owners’ Equity
Bentley, Capital 4 8 0 0 000
Colby, Capital 3 6 0 0 000
Musharaf, Capital 2 4 0 0 000 1 0 8 0 0 0 00
Total Liabilities and
Total Assets $ 1 3 8 0 0 000 Owner’s Equity $ 1 3 8 0 0 000

Prepare the general journal entries, without explanations, to record (1) the sale of
the other assets; (2) the distribution of the loss or gain on realization; (3) the
payment to the creditors; and (4) the final distribution of cash. Each of the
following are unrelatedassumptions.
a. The other assets are sold for $115,000.
b. The other assets are sold for $79,000.
c. The other assets are sold for $55,000.

PROBLEM 14.7
Irby, Jalisco, and Whitehorse are partners in a video rental business, sharing profits
and losses in a 2:1:1 ratio. Business has decreased due to the number of other rental
stores in their area. They decide it would be best to liquidate. Their December 31,
20XX balancesheet information is as follows.
Balance Sheet Information
Cash $15,000
Video Inventory 75,000
Accounts Payable 25,000
Irby, Capital 25,000
Jalisco, Capital 20,000
Whitehorse, Capital 20,000

In st r u ct i on s
Prepare the general journal entries, without explanations, to show: (1) the sale of
the noncash assets; (2) the distribution of the losses or gains; (3) the payment to
the credi- tors; and (4) the final distribution of cash under each of the following
independent assumptions.
a. The video inventory is sold for $63,000.
b. The video inventory is sold for $25,000
c. The video inventory is sold for $20,000 and the partner with the deficit can
anddoes pay from personal assets.
d. The same assumption as c above, except the partner with the deficit cannot pay.