Chapter 12

Accounting for Partnerships and Limited Liability Companies

Study Guide Solutions Fill-in-the-Blank Equations

1. Net income for the year 2. Revenue per employee

Exercises

1. Wyatt Parks would like to form a business but is unsure which legal form would be best for him. He would like to have limited liability against creditor claims if the business does not succeed. If the company is successful, Parks does not want the life of the business to be limited to his lifetime. What type of legal form would best fit his needs?

Limited Liability Company (LLC)

2. Michael Bryan is looking to develop a new company. Bryan believes that the company will be unsuccessful at first, so he prefers the net income or loss to pass through to his personal tax return for taxation. He does not have any business associates, so he will be forming the business alone. What type of legal form would best fit his needs?

Proprietorship

3. Determine if each description is related to a proprietorship, partnership, or limited liability company.

a. Partnership

b. Proprietorship

c. Limited liability company

Strategy: Knowing the types of owners a business has can be helpful to remember the characteristics of that type. For example, because a proprietorship has one owner, the life is limited to its owner, and the same for a partnership and its owners. Also, with only one owner, a proprietorship does not need an agreement among owners, as under a partnership and an LLC. Additionally, because the owner(s) of a proprietorship and partnership are solely responsible for the business, the funds are limited to what the owner(s) can contribute, but they also must absorb all losses (and have unlimited liability).

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4. Jonathan Meyers contributes the following items to his newly formed partnership: Cash, $475; Equipment, $1,300; Accounts Payable, $200; and Inventory, $650. Prepare the journal entry to record his contribution on August 1, 2015.

Aug. 1 Cash 475 Inventory 650 Equipment 1,300 Accounts Payable 200 Jonathan Meyers, Capital 2,225

5. Jack L. and Matthew C. would like to combine businesses to form a partnership. Jack

contributes the following: Building, $7,950; Notes Payable on the building, $2,150; and Inventory, $790. Matthew contributes $1,200 of Accounts Receivable, which has an Allowance for Doubtful Accounts of $250. Matthew also contributes $970 of cash. Prepare the journal entry to record the contributions, which occur on August 21, 2015.

Aug. 21 Cash 970 Accounts Receivable 1,200 Inventory 790 Building 7,950 Allowance for Doubtful Accounts 250 Notes Payable 2,150 Jack L., Capital 6,590 Matthew C., capital 1,920

or:

Aug. 21 Cash 970 Accounts Receivable 1,200 Allowance for Doubtful Accounts 250 Matthew C., Capital 1,920

21 Inventory 790 Building 7,950 Notes Payable 2,150 Jack L., Capital 6,590

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Accounting for Partnerships and Limited Liability Companies 3

6. Owen Dillard and Ryan Keller are looking to form a new partnership. Dillard contributes the following to the partnership: Equipment, $875; Building, $6,790; Notes Payable, $2,100; and Cash, $260. Keller contributes the following: Accounts Receivable, $900 with an allowance for doubtful accounts of $160; Inventory, $675; Cash, $125; and Accounts Payable, $250. Prepare the journal entry to record the partners contributions on September 1, 2015.

Sept. 1 Cash 385 Accounts Receivable 900 Inventory 675 Equipment 875 Building 6,790 Allowance for Doubtful Accounts 160 Accounts Payable 250 Notes Payable 2,100 Owen Dillard, Capital 5,825 Ryan Keller, Capital 1,290

or: Sept. 1 Cash 260

Equipment 875 Building 6,790 Notes Payable 2,100 Owen Dillard, Capital 5,825

1 Cash 125 Accounts Receivable 900 Inventory 675

Allowance for Doubtful Accounts 160 Accounts Payable 250 Ryan Keller, Capital 1,290

Strategy: The net amount of assets and liabilities (net assets) contributed to a partnership upon formation is equal to the partners initial interest, since Assets = Liabilities + Owners Equity. The amount contributed (net assets) is equal to the interest received (beginning balance of capital account). Assets should be debited to increase the balance, while liabilities should be credited to increase the balance. The partners capital accounts will be increased by the same amount of the net assets contributed with a credit.

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7. Kelly R. and Rose C. formed a partnership in the previous year. In the agreement, each partner promises to perform services for the partnership. Kelly R. receives a $3,500 monthly salary while Rose C. receives a $4,000 monthly salary. For the 2015 fiscal year ending on September 30, 2015, the partnership earned a net income of $247,000. If the partnership income is divided among partners based on services provided, determine the amount allocated to each partner. Any remaining income after the annual salary is divided equally. Also prepare the journal entry to record the division of net income.

Kelly R. Rose C. Total

Annual salary allowance $42,000 $48,000 $90,000 ($3,500 12 mo.) ($4,000 12 mo.) Remaining income 78,500 78,500 157,000 Net income $120,500 $126,500 $247,000

Sept. 30 Income Summary 247,000 Kelly R., Capital 120,500 Rose C., Capital 126,500

8. Ashley F. and Charles K.s partnership earns $300,000 of net income for the 2015 fiscal

year ending March 31, 2015. The partnership agreement states the net income should be allocated to partners according to the services provided to the partnership, with any remaining net income also allocated according to the contributions of services provided. Ashley F. receives a $5,200 monthly allowance, while Charles K. receives a $5,750 monthly allowance. Determine the amount allocated to each partner and prepare the journal entry to record the division of net income. Round percentages and answers to two decimal places.

Ashley F. Charles K. Total

Annual salary allowance $62,400 $69,000 $131,400 ($5,200 12 mo.) ($5,750 12 mo.) Percentage Services Provided 47.49% 52.51% 100% ($62,400/$131,400) ($69,000/$131,400) Remaining income 80,068.14 88,531.86 168,600 (47% $168,600) (53% $168,600) Net income $142,468.14 $157,531.86 $300,000

Mar. 31 Income Summary 300,000.00 Ashley F., Capital 142,468.14 Charles K., Capital 157,531.86

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Accounting for Partnerships and Limited Liability Companies 5

9. JJ&T Partnership has three partners, James Small, Josh Platt, and Turner Lyle, who allocate net income according to the services provided and any remainder equally. The partnership agreement states that James and Turner will provide services for $2,500 a month while Josh will provide services for $3,750. For the fiscal year ending December 31, 2015, the partnership earned $192,600. Determine the amount allocated to each partner and prepare the journal entry to record the division of net income.

James S. Josh P. Turner L. Total

Annual salary allowance $30,000 $45,000 $30,000 $105,000 ($2,500 12 mo.) ($3,750 12 mo.) ($2,500 12 mo.) Remaining income 29,200 29,200 29,200 87,600 Net income $59,200 $74,200 $59,200 $192,600

Dec. 31 Income Summary 192,600 James Small, Capital 59,200 Josh Platt, Capital 74,200 Turner Lyle, Capital 59,200

Strategy: First, determine the amount each partner will receive annual. Next, subtract the total annual salaries from the net income to find the amount of any residual income. The residual income should be allocated to the partners based on what is promised in the partnership agreement. The journal entry to record the increase in the partners capital account would include a debit to Income Summary and a credit to each partners capital account for their share of net income.

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10. Assume that K&R Associates divides income based upon salary allowances and 15% interest on the capital balances of each partner (Kelly R. and Rose C.), with any remaining net income allocated equally. For the March 31, 2016, fiscal year, determine the amount allocated to each partner using the information below if the partnership earned $175,000.

Monthly Salary Allowance Capital Balance on April 1, 2015

Kelly R. $2,200 $135,400 Rose C. 2,750 110,800

Kelly R. Rose C. Total

Annual salary allowance $26,400 $33,000 $59,400 ($2,200 12 mo.) ($2,750 12 mo.) Interest allowance 20,310 16,620 36,930 ($135,400 15%) ($110,800 15%) Total $46,710 $49,620 $ 96,330 Remaining income 39,335 39,335 78,670 Net Income $86,045 $88,955 $175,000

11. Jack L. and Matth