BUAD 121 OUC Profit Sharing Among Firm Partners Article Review You need to find a relevant newspaper article for chapter 12 (partnerships), summarize HOW i

BUAD 121 OUC Profit Sharing Among Firm Partners Article Review You need to find a relevant newspaper article for chapter 12 (partnerships), summarize HOW it is relevant to the chapter and ask questions at least two to your peers about their articles. The article MUST be dated 2018 – 2020. No outdated articles or blog posts are accepted. 

In order to get full marks you must:

#1.  write at least three paragraphs summarizing your article (350 words minimum) and provide the link (without a link it is a zero). You CANNOT have the same article as a peer (so whoever posts first “gets to keep it”)

AND 

#2. ask two questions to your peers on their thoughts on a topic pertaining to their article (minimum 100 words per post). These must be unique questions. If a student already has any more than three peers that asked questions on their post, find a different thread. We don’t want 40 students asking one person questions. 

AND 

#3. answer any questions your peers ask of you.

Each student please create a new post for YOUR article, but if responding to a peer, please do not create a new post and just hit reply to the existing thread. 

**You must have two meaningful contributions for full marks. I want to see back and forth discussions here, not just “cool info thx”. Nothing copy and pasted from other sources will get credit.

Due Jul 29 11:55pm for ALL students. Meaning you cannot hop on last minute and get full marks. 

HOW WILL THIS BE ASSESSED??

5% for the article and summary. 

5% for the peer discussion. 

I am looking for you to not repeat the information in the article but rather use it to highlight a topic learned in your assigned chapter. Top marks will be awarded to students who have a clear summary and explanation of how their article is associated to their chapter and hold insightful discussions with their peers. Chapter 12
Accounting For
Partnerships
CHAPTER 12: LEARNING OBJECTIVE
1. Describe the characteristics of the partnership form of
business organization.
2. Account for the formation of a partnership.
3. Allocate and record profit or loss to partners.
4. Prepare partnership financial statements.
5. Account for the admission of a partner.
6. Account for the withdrawal of a partner.
7. Account for the liquidation of a partnership.
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Partnership
An unincorporated association of two or more
persons to pursue a business for profit as co-owners.
© 2016 McGraw-Hill Education
1
LO11-3
Partnership Agreement
• Written contract between two or more parties to form a
partnership
• Contains basic information:
• Name and main location of firm
• Purpose of the business
• Date of inception
• Specifies relationship of partners:
•
•
•
•
Names and capital contributions of partners
Rights and duties of partners
Basis for sharing profit or loss
Procedures for admission, withdrawal, death of partner,
resolving disputes, liquidation of partnership
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Basic Partnership Accounting: Forming a
Partnership
• Partner’s initial investment is recorded at fair value of
assets contributed
• As at date of transfer into partnership
• Values assigned are agreed to by all partners
• After partnership formed, accounting for transactions
is similar to other types of business organizations
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Let’s do one together BE12-2
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Canada, Ltd.
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BRIEF EXERCISE 12.2
Cash
15,000
B. Ripley, Capital
15,000
**Invested cash in business.
Cash
10,000
Equipment
3,000
F. Nichols, Capital
13,000
**Invested cash and equipment in business
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Canada, Ltd.
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Basic Partnership Accounting: Dividing
Profit or Loss
• Partnership profit/loss is shared equally
• Unless partnership agreement indicates otherwise
• Called the profit ratio or profit and loss ratio
• Each partners’ share of profit or loss is recognized
through closing entries
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Partnership Accounting: Profit and Loss
Ratios
• Typical ratios used to share profit or loss:
• Fixed ratio: a proportion (2:1), percentage (67%) or fraction
(2/3)
• A ratio based on capital balances at beginning or end of year
or on average capital balances during the year
• Salary and interest allowances to partners, remainder in a
fixed ratio
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Partnership Accounting: Profit and Loss
Ratios
• Salaries and interest allowances:
• Are allocated first even if greater than profit or if partnership
incurred a loss for the year
• Are NOT expenses of the partnership – only used to divide
profit or loss among the partners
• Are NOT distributions of cash (or other assets) – drawings by
partners are distributions
• Partners are neither employees or creditors
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Dividing Income or Loss
The partnership income or loss may be allocated
based on:
•
•
•
Fractional basis
Ratio of capital investments
Salaries, interest allowance and any remainder in a fixed
ratio
* In the absence of an agreement the law says income or losses
are shared equally
Income and loss sharing based on a
fractional basis
Creagh and Hug agree to share income and losses on a 2:1
ratio. The income for the year is $90,000.
The entry to close the income summary account is :
Income summary
90,000
Creagh, capital
60,000
Hug, capital
30,000
2/3 x 90,000 = 60,000
1/3 x 90,000 = 30,000
Income and loss sharing based on ratio of
capital investments
Creagh and Hug agree to share income and losses on the
basis of their beginning capital investments. Assume
partnership income for the year is $90,000, and Creagh
and Hug’s beginning-of-year capital balances are $20,000
and $30,000 respectively.
The entry to close the income summary account is :
Income summary
90,000
Creagh, capital
36,000
Hug, capital
54,000
20,000/50,000 x 90,000 = 36,000
30,000/50,000 x 90,000 = 54,000
Income and loss sharing based on salaries,
interest allowance, and a fixed ratio
Creagh and Hug agree to share income or losses as follows:
1. Annual salary allowances of $30,000 for Creagh and
$10,000 for Hug.
2. Interest allowances of 10% of beginning-of-year capital
balance.
3. Remainder to be shared equally.
Assume partnership income for the year is $90,000 and
Creagh and Hug’s beginning-of-year capital balances are
$80,000 and $70,000 respectively.
Always follow this flow…
Creagh
Hug
Balance
Net Income
90,000
Salary Allowance
30,000
10,000
-40,000
Interest Allowance
8,000
7,000
-15,000
Subtotal
35,000
Remainder (equal)
17,500
17,500
-35,000
Allocation to Partners
55,500
34,500
0
The entry to close the income summary account
is :
Income summary
Creagh, capital
Hug, capital
90,000
55,500
34,500
11-15
Income and loss sharing based on salaries,
interest allowance, and a fixed ratio
Assume the same income and loss sharing agreement as
before and that there is a net loss of $10,000 for the
year.
Now lets see a loss…
Creagh
Hug
Net Income
Balance
-10,000
Salary Allowance
30,000
10,000
-40,000
Interest Allowance
8,000
7,000
-15,000
Subtotal
-65,000
Remainder (equal)
-32,500
-32,500
65,000
Allocation to Partners
5,500
-15,500
-10,000
The entry to close the income summary account
is :
Hug, capital
15,500
Income summary
Creagh, capital
10,000
5,500
11-17
Mini-Quiz
R, H, and D formed a partnership with R contributing
$60,000, H contributing $50,000, and D contributing
$40,000. Their partnership agreement called for the
earnings division to be based on the ratio of capital
investments. If the partnership had earnings of $74,000
for its first year of operation, what amount of earnings
(rounded) would be credited to D’s capital account?
The amount credited would be $19,733.
40,000/(60,000+50,000+40,000) x $74,000 = $19,733
Partnership Accounting: Closing Entries
Four closing entries for partnership:
1.
2.
3.
4.
Close revenue accounts to income summary
Close expense accounts to income summary
Close income summary to partners’ capital accounts
Close each partner’s drawings account to their respective
capital accounts
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Lets try BE 12-6, BE12-8, BE12-9
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Canada, Ltd.
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BRIEF EXERCISE 12.6
(a)
A. Scrimger $84,000 × 3/8 = $31,500
D. Woods $84,000 × 5/8 = $52,500
(b)
Income Summary
84,000
A. Scrimger, Capital
31,500
D. Woods, Capital
To close Income Summary.
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Canada, Ltd.
52,500
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Partnership Financial Statements:
Statement of Partners’ Equity
• The equity statement for a partnership is the statement of
partners’ equity
• Explains changes in each partner’s capital account and in
total partnership equity during the year
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Partnership Financial Statements: Balance
Sheet
• Capital balances of each partner are shown on the
balance sheet in section called partners’ equity:
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Admission of a Partner
• Causes the legal dissolution of the existing partnership
and the beginning of a new partnership
• A new partner may be admitted either by:
• Purchasing the interest of one or more existing partners
• Investing assets in the partnership
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Admission of a Partner: Purchase of a
Partner’s Interest
• A personal transaction between one or more existing
partners and the new partner
• Consideration exchanged is personal property of the
partners involved and not property of the partnership
• In the partnership, only the transfer of the partnership
interest is recorded:
• Existing partners’ equity is decreased by the amount of
equity given to the new partner
• New partner’s equity is increased by same amount
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Purchase of Partnership Interest
Creagh and Hug continues to operate for several years.
Creagh’s beginning of the year capital balance is
$100,000. Creagh sells one half of his partnership
interest to Kai for $60,000.
The entry to record the admission of Kai is:
Creagh, capital
Kai, capital
50,000
50,000
50% x $100,000
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Admission of a Partner: Investment of
Assets in Partnership
• A transaction between the new partner and the
partnership:
• Partnership receives assets from new partner in
exchange for an interest in the partnership
• Both net assets and total partners’ equity of the
partnership will increase
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Admission of a Partner: Investment of
Assets in Partnership
Three possibilities:
1. Investment is equal to share of equity.
2. Investment is greater than share of equity
(bonus to old partners).
3. Investment is less than share of equity (bonus to
new partner).
• Complications occur when new partner’s investment
differs from the capital equity acquired (so 2 & 3):
• The difference is considered a bonus either to the
existing (old) partners or to the new partner
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Admission of a Partner: Bonus to Existing
(Old) Partners
• Bonus to old partners may be necessary:
• Fair value of partnership assets may be greater than their
carrying value
• Goodwill may exist that has not been recorded
• Bonus to old partners occurs when:
• New partner’s investment > capital account credit on the
date of admission
• Amount of bonus = difference
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Admission of a Partner: Bonus to New
Partner
• Bonus to new partner may be necessary:
• New partner has resources or attributes that the partnership
wants (cash, expertise)
• Carrying amount of partnership assets is greater than their
fair value
• Bonus to new partner occurs when:
• New partner’s investment capital credit: bonus to old partners
• If investment departing partner’s
capital balance on the date of departure
• Amount of bonus = difference
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Withdrawal of a Partner:
Example Calculation of Bonus
• Partners’ capital balance:
Creagh $50,000
Kai $30,000
Hug $20,000
• Partners’ profit ratio:
Creagh, Kai, Hug: 3:2:1
• Hug retires and is paid:
Scenario 1: $25,000
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Withdrawal of a Partner: Bonus
Calculation
Scenario 1:
1. Amount of bonus to departing partner:
• $25,000 − $20,000 = $5,000
2. Allocate payment of bonus by remaining partners:
• From Creagh: $5,000 × 3/5 = $3,000
• From Kai:
$5,000 × 2/5 = $2,000
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Withdrawal of a Partner: Bonus to
Remaining Partners
• Bonus to remaining partners may be necessary:
• Recorded assets are overvalued
• Partnership has a poor earnings record
• Partner wishes to leave partnership
• Bonus to remaining partners occurs when:
• Payment to departing partner capital balance: bonus to departing partner
• If payment