Partnerships and Limited Liability Corporations Accounting, 21 st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus.
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Partnerships and Limited Partnerships and Limited Liability CorporationsLiability Corporations
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
1. Describe the basic characteristics of proprietorships, corporations, partnerships, and limited liability corporation.
2. Describe and illustrate the equity reporting for proprietorships, corporations, partnerships, and limited liability corporations.
3. Describe and illustrate the accounting for forming a partnership.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
4. Describe and illustrate the accounting for dividing the net income and net loss of a partnership.
ObjectivesObjectivesObjectivesObjectives
5. Describe and illustrate the accounting for the dissolution of a partnership.
6. Describe and illustrate the accounting for liquidation of a partnership.
7. Describe the lifecycle of a business, including the role of venture capitalists, initial public offerings, and underwriters.
Alternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAdvantages
• Ease in organizing• Low cost of
organizing
Disadvantages• Difficulty in raising
large amounts of capital
• Unlimited liability
Joe’s
Review of Chapter 1Review of Chapter 1
A proprietorship is owned by one individual.
A proprietorship is owned by one individual.
Alternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business Entities
A corporation is organized under state or federal
statutes as a separate legal entity.
A corporation is organized under state or federal
statutes as a separate legal entity.
Advantages• The ability to obtain large
amounts of resources by issuing stocks
• Limited liability for the owners
Disadvantages• Double taxation• More complexity
and regulations
J & M, Inc.
Alternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business Entities
J & M, Inc.
A business may organize as an S Corporation. The IRS allows income to pass through the S Corporation
to the individual stockholder without the
corporation having to pay tax on the income.
A business may organize as an S Corporation. The IRS allows income to pass through the S Corporation
to the individual stockholder without the
corporation having to pay tax on the income.
Alternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business Entities
A partnership is an association of two
or more individuals.
A partnership is an association of two
or more individuals.
Advantages• More financial
resources than a proprietorship
• Additional management skills
Joe and Marty’s
Alternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business Entities
Disadvantages• Limited life• Unlimited liability• Co-ownership of
partnership property• Mutual agency
Joe and Marty’s
A partnership is an association of two
or more individuals.
A partnership is an association of two
or more individuals.
Alternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business Entities
An important right of partners is to participate in
the income of the partnership.
An important right of partners is to participate in
the income of the partnership.
Alternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business Entities
Each partner must report their share of partnership income on their personal
tax returns.
Each partner must report their share of partnership income on their personal
tax returns.
Alternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business Entities
A partnership is created by a contract, known as
the partnership agreement or articles of
partnership.
A partnership is created by a contract, known as
the partnership agreement or articles of
partnership.
Alternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business Entities
Unless specified in the operating agreement, LLCs have a limited life.
Members may elect operating the LLC as a “member managed” entity.
LLC provides limited liability for the members. LLCs must file “articles of organization” with
state governmental authorities.
Comparison of Alternate Entity Characteristics
Comparison of Alternate Entity Characteristics
Ease of FormationEase of Formation
Proprietorship Simple
Corporation Complex
Partnership Simple
LLC Moderate
Comparison of Alternate Entity Characteristics
Comparison of Alternate Entity Characteristics
Legal LiabilityLegal Liability
Proprietorship No limitation
Corporation Limited liability
Partnership No limitation
LLC Limited liability
Comparison of Alternate Entity Characteristics
Comparison of Alternate Entity Characteristics
TaxationTaxation
Proprietorship Nontaxable entity
Corporation Taxable entity
Partnership Nontaxable entity
LLC Nontaxable entity by election
Comparison of Alternate Entity Characteristics
Comparison of Alternate Entity Characteristics
Limitation on Life of EntityLimitation on Life of Entity
Proprietorship Yes
Corporation No
Partnership Yes
LLC Yes
Comparison of Alternate Entity Characteristics
Comparison of Alternate Entity Characteristics
Ease of Raising CapitalEase of Raising Capital
Proprietorship Difficult
Corporation Easier
Partnership Moderate
LLC Moderate
Equity Reporting for Equity Reporting for Alternative Entity FormsAlternative Entity Forms
Equity Reporting for Equity Reporting for Alternative Entity FormsAlternative Entity Forms
ProprietorshipsProprietorships
Proprietorships use a capital account to record investments by the owner of the business.
Withdrawals by the owner are recorded in the owner’s drawing account.
Equity Reporting for Equity Reporting for Alternative Entity FormsAlternative Entity Forms
Equity Reporting for Equity Reporting for Alternative Entity FormsAlternative Entity Forms
ProprietorshipsProprietorships
Greene LandscapesStatement of Owner’s Equity
For the year ended December 31, 2006Duncan Greene, capital, Dec. 31, 2005 $345,000Net income $79,000Less withdrawals 35,000Increase in owner’s equity 44,000Duncan Greene, capital, Dec. 31, 2006 $389,000
Equity Reporting for Equity Reporting for Alternative Entity FormsAlternative Entity Forms
Equity Reporting for Equity Reporting for Alternative Entity FormsAlternative Entity Forms
CorporationsCorporations
Investments by stockholders in the business use capital stock accounts, such as Common Stock and Preferred Stock.
Dividends to owners (stockholders) are recorded by a debit to Retained Earnings.
Equity Reporting for Equity Reporting for Alternative Entity FormsAlternative Entity Forms
Equity Reporting for Equity Reporting for Alternative Entity FormsAlternative Entity Forms
CorporationsCorporations
Equity Reporting for Equity Reporting for Alternative Entity FormsAlternative Entity Forms
Equity Reporting for Equity Reporting for Alternative Entity FormsAlternative Entity Forms
Partnerships and Limited Liability CorporationsPartnerships and Limited Liability Corporations
Investments and withdrawals for partnerships is similar to proprietorships, except there is a capital and drawing account for each partner.
Limited liability corporations are similar to a partnership except that each owner is referred to as “member.”
Equity Reporting for Alternative Equity Reporting for Alternative Entity FormsEntity Forms
Equity Reporting for Alternative Equity Reporting for Alternative Entity FormsEntity Forms
PartnershipsPartnerships
Forming a PartnershipForming a Partnership Forming a PartnershipForming a Partnership
Joseph Stevens and Earl Foster agree to combine their hardware businesses in a partnership. They
agree that the partnership is to assume the liabilities of the separate businesses.
Joseph Stevens and Earl Foster agree to combine their hardware businesses in a partnership. They
agree that the partnership is to assume the liabilities of the separate businesses.
Allowance for Doubtful Accounts1 500 00Accounts Payable2 600 00Joseph Stevens, Member Equity55 000 00
Stevens’ Transfer of Assets, Liability, and Equity
Dividing IncomeDividing Income Dividing IncomeDividing Income
Services of PartnersServices of Partners
The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to have an annual salary allowance of $30,000 and Mills is to receive $24,000. Any net income is to be divided equally.
The firm had a net income of $75,000.
The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to have an annual salary allowance of $30,000 and Mills is to receive $24,000. Any net income is to be divided equally.
The firm had a net income of $75,000.
J. Stone C. Mills TotalSalary allowance $30,000 $24,000 $54,000Remaining income 10,500 10,500 21,000Division of net income $40,500 $34,500 $75,000
Dividing IncomeDividing Income Dividing IncomeDividing Income
Services of PartnersServices of Partners
Dec. 31 Income Summary 75 000 00
Jennifer Stone, Capital40 500 00
Crystal Mills, Capital 34 500 00
Dividing IncomeDividing Income Dividing IncomeDividing Income
LLC AlternativeLLC Alternative
Dec. 31 Income Summary 75 000 00
Jennifer Stone, Member Equity40 500 00
Crystal Mills, Member Equity 34 500 00
Dividing IncomeDividing Income Dividing IncomeDividing Income
Services of Partners and InvestmentsServices of Partners and Investments
The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to have an
annual salary allowance of $30,000 and Mills is to receive $24,000. Interest of 12% is provided on each partner’s capital balance on January 1. Any net income is to be divided equally. The
firm had a net income of $75,000.
The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to have an
annual salary allowance of $30,000 and Mills is to receive $24,000. Interest of 12% is provided on each partner’s capital balance on January 1. Any net income is to be divided equally. The
firm had a net income of $75,000.
Dividing IncomeDividing Income Dividing IncomeDividing Income
Services of Partners and InvestmentsServices of Partners and Investments
J. Stone C. Mills TotalSalary allowance $30,000 $24,000 $54,000Interest allowance 9,600 7,200 16,800
Division of net income $41,700 $33,300 $75,000$80,000 x
12%
$80,000 x 12%
$60,000 x 12%
$60,000 x 12%
Remaining income 2,100 2,100 4,200
Dividing IncomeDividing Income Dividing IncomeDividing Income
Services of PartnersServices of Partners
Dec. 31 Income Summary 75 000 00
Jennifer Stone, Capital41 700 00
Crystal Mills, Capital 33 300 00
Dividing IncomeDividing Income Dividing IncomeDividing Income
LLC AlternativeLLC Alternative
Dec. 31 Income Summary 75 000 00
Jennifer Stone, Member Equity41 700 00
Crystal Mills, Member Equity 33 300 00
Dividing IncomeDividing Income Dividing IncomeDividing Income
Allowances Exceed Net IncomeAllowances Exceed Net Income
Assume the same facts as before except that the net income is only $50,000.
Assume the same facts as before except that the net income is only $50,000.
J. Stone C. Mills TotalSalary allowance $30,000 $24,000 $54,000Interest allowance 9,600 7,200 16,800 Total $39,600 $31,200 $70,800
Division of net income $29,200 $20,800 $50,000Deduct excess equally 10,400 10,400 20,800
Partner Bonuses from New PartnerPartner Bonuses from New Partner
Equity of Jenkins $20,000Equity of Kramer 24,000Diaz’s Contribution 31,000Total equity after admitting Diaz $75,000Diaz’s interest (1/3 x $75,000) $25,000
Diaz’s contribution $31,000Diaz’s equity after admission 25,000Bonus paid to Jenkins and Kramer $ 6,000
Farley, Greene, and Hall share income and losses in a ratio of 5:3:2. On April 9, after discontinuing
operations, the firm had the following trial balance.
Farley, Greene, and Hall share income and losses in a ratio of 5:3:2. On April 9, after discontinuing
operations, the firm had the following trial balance.
Cash $11,000Noncash Assets 64,000Liabilities $ 9,000Jean Farley, Capital 22,000Brad Greene, Capital 22,000Alice Hall, Capital 22,000 Total $75,000 $75,000