6-ch13-corporation_warren-reeve-wajib.ppt

Intermediate accounting

1. Chapter Chapter 1313
Partnerships and Limited Partnerships and Limited
Liability CorporationsLiability Corporations
Accounting, 21
st
Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
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3. 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.
ObjectivesObjectives
After studying this After studying this
chapter, you should chapter, you should
be able to:be able to:

4. 4.Describe and illustrate the accounting
for dividing the net income and net loss
of a partnership.
ObjectivesObjectives
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.

5. Alternative Forms of Business EntitiesAlternative Forms of Business Entities
Advantages
•Ease in organizing
•Low cost of
organizing
Disadvantages
•Difficulty in raising
large amounts of
capital
•Unlimited liability
Joe’s
Review of Chapter 1
A proprietorship is
owned by one
individual.

6. Alternative Forms of Business EntitiesAlternative Forms of Business Entities
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.

7. Alternative 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.

8. Alternative Forms of Business EntitiesAlternative Forms of Business Entities
A partnership is an
association of two
or more individuals.

Advantages
•More financial
resources than a
proprietorship
•Additional
management skills
Joe and Marty’s

9. Alternative 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.

10. Alternative Forms of Business EntitiesAlternative Forms of Business Entities
An important right of
partners is to participate in
the income of the
partnership.

11. Alternative Forms of Business EntitiesAlternative Forms of Business Entities
Each partner must
report their share of
partnership income
on their personal
tax returns.

12. Alternative Forms of Business EntitiesAlternative Forms of Business Entities
A partnership is created
by a contract, known as
the partnership
agreement or articles of
partnership.

13. Alternative Forms of Business EntitiesAlternative Forms of Business Entities
A variant of the
regular partnership
is a limited
partnership.
This form of partnership
allows partners that are
not involved in the
operations of the
partnership to retain
limited liability.

14. Limited Liability CorporationsLimited Liability Corporations
Combines the advantages of the corporate and
partnership forms.
Owners are termed “members” rather than
“partners.”
Members must create an operating agreement.
LLC may elect to be treated as a partnership
for tax purposes.
Continued

15. Limited Liability CorporationsLimited Liability Corporations
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.

16. Comparison of Alternate
Entity Characteristics
Ease of Formation
ProprietorshipSimple
CorporationComplex
PartnershipSimple
LLC Moderate

17. Comparison of Alternate
Entity Characteristics
Legal Liability
ProprietorshipNo limitation
CorporationLimited liability
PartnershipNo limitation
LLC Limited liability

18. Comparison of Alternate
Entity Characteristics
Taxation
ProprietorshipNontaxable entity
CorporationTaxable entity
PartnershipNontaxable entity
LLC Nontaxable entity by election

19. Comparison of Alternate
Entity Characteristics
Limitation on Life of Entity
ProprietorshipYes
CorporationNo
PartnershipYes
LLC Yes

20. Comparison of Alternate
Entity Characteristics
Ease of Raising Capital
ProprietorshipDifficult
CorporationEasier
PartnershipModerate
LLC Moderate

21. Equity Reporting for Equity Reporting for
Alternative Entity FormsAlternative Entity Forms
Proprietorships
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.

22. Equity Reporting for Equity Reporting for
Alternative Entity FormsAlternative Entity Forms
Proprietorships
Greene Landscapes
Statement of Owner’s Equity
For the year ended December 31, 2006
Duncan Greene, capital, Dec. 31, 2005 $345,000
Net income $79,000
Less withdrawals 35,000
Increase in owner’s equity 44,000
Duncan Greene, capital, Dec. 31, 2006 $389,000

23. Equity Reporting for Equity Reporting for
Alternative Entity FormsAlternative Entity Forms
Corporations
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.

24. Equity Reporting for Equity Reporting for
Alternative Entity FormsAlternative Entity Forms
Corporations

25. Equity Reporting for Equity Reporting for
Alternative Entity FormsAlternative Entity Forms
Partnerships 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.”

26. Equity Reporting for Alternative Equity Reporting for Alternative
Entity FormsEntity Forms
Partnerships

27. 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.
Apr.1Cash 7 200 00
Accounts Receivable 16 300 00
Merchandise Inventory 28 700 00
Store Equipment 5 400 00
Office Equipment 1 500 00
Allowance for Doubtful Accounts
1 500 00
Accounts Payable
2 600 00
Joseph Stevens, Capital
55 000 00
Stevens’ Transfer of Assets, Liability, and Equity

28. Forming a PartnershipForming a Partnership
A similar entry would be made
for the assets, liabilities, and
equity of Earl Foster.

29. Forming a PartnershipForming a Partnership
Assume that instead of forming a partnership, the
two men formed a limited liability corporation.
Apr.1Cash 7 200 00
Accounts Receivable 16 300 00
Merchandise Inventory 28 700 00
Store Equipment 5 400 00
Office Equipment 1 500 00
Allowance for Doubtful Accounts
1 500 00
Accounts Payable
2 600 00
Joseph Stevens, Member Equity
55 000 00
Stevens’ Transfer of Assets, Liability, and Equity

30. Dividing IncomeDividing Income
Services 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.
J. Stone C. Mills Total
Salary allowance $30,000$24,000$54,000
Remaining income 10,50010,50021,000
Division of net income$40,500$34,500$75,000

31. Dividing IncomeDividing Income
Services of Partners
Dec.31Income Summary 75 000 00
Jennifer Stone, Capital
40 500 00
Crystal Mills, Capital
34 500 00

32. Dividing IncomeDividing Income
LLC Alternative
Dec.31Income Summary 75 000 00
Jennifer Stone, Member Equity
40 500 00
Crystal Mills, Member Equity
34 500 00

33. Dividing IncomeDividing Income
Services 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.

34. Dividing IncomeDividing Income
Services of Partners and Investments
J. Stone C. Mills Total
Salary allowance $30,000$24,000$54,000
Interest allowance 9,600 7,20016,800
Division of net income$41,700$33,300$75,000
$80,000 x
12%
$60,000 x
12%
Remaining income 2,100 2,1004,200

35. Dividing IncomeDividing Income
Services of Partners
Dec.31Income Summary 75 000 00
Jennifer Stone, Capital
41 700 00
Crystal Mills, Capital
33 300 00

36. Dividing IncomeDividing Income
LLC Alternative
Dec.31Income Summary 75 000 00
Jennifer Stone, Member Equity
41 700 00
Crystal Mills, Member Equity
33 300 00

37. Dividing IncomeDividing Income
Allowances Exceed Net Income
Assume the same facts as before except that
the net income is only $50,000.
J. Stone C. Mills Total
Salary allowance $30,000$24,000$54,000
Interest allowance 9,600 7,200 16,800
Total $39,600$31,200$70,800
Division of net income$29,200$20,800$50,000
Deduct excess equally10,40010,40020,800

38. Partnership DissolutionPartnership Dissolution
Admitting a Partner
1.Purchasing an interest from one or more of
the current partners.
2.Contributing assets to the partnership.
A person may be admitted to a partnership
only with the consent of all partners by:

39. Partnership DissolutionPartnership Dissolution
Purchasing an Interest in a Partnership
Partners Tom Andrews and Nathan Bell
have capital balances of $50,000 each.
On June 1, each sells one-fifth of his
equity to Joe Canter for $10,000 in cash.

40. Partnership DissolutionPartnership Dissolution
Purchasing an Interest in a Partnership
June1Tom Andrews, Capital 10 000 00
Nathan Bell, Capital 10 000 00
Joe Canter, Capital
20 000 00
For a LLC, members’ equity accounts would
have been used rather than capital accounts.

41. Partnership DissolutionPartnership Dissolution
Contributing Assets to a Partnership
Partners Donald Lewis and Gerald Morton
have capital balances of $35,000 and
$25,000, respectively. On June 1, Sharon
Nelson joins the partnership by
permission and makes an investment of
$20,000 cash.

42. Partnership DissolutionPartnership Dissolution
Contributing Assets to a Partnership
June1Cash 20 000 00
Sharon Nelson, Capital
20 000 00
For a LLC, Sharon Nelson, Member Equity
would have been credited.

43. Partnership DissolutionPartnership Dissolution
Revaluation of Assets
Partners Donald Lewis and Gerald Morton
have capital balances of $35,000 and
$25,000, respectively. The balance in
Merchandise Inventory is $14,000 and
the current replacement value is $17,000.
The partners share net income equally.

44. Partnership DissolutionPartnership Dissolution
June1Merchandise Inventory 3 000 00
Donald Lewis, Capital
1 500 00
Gerald Morton, Capital
1 500 00
Because the LLC alternative follows a pattern
of replacing “Capital” with “Member Equity,”
the LLC entry will not be shown again.
Revaluation of Assets

45. Partnership DissolutionPartnership Dissolution
Partner Bonuses
On March 1, the partnership of Marsha
Jenkins and Helen Kramer admit Alex
Diaz as a new partner. The assets of the
old partnership are adjusted to a fair
market values and the resulting capital
balances for Jenkins and Kramer are
$30,000 and $24,000, respectively.

46. Partnership DissolutionPartnership Dissolution
Partner Bonuses
Jenkins and Kramer agree to admit Diaz
as a partner for $31,000. In return, Diaz
will receive a one-third equity in the
partnership and will share income and
losses equally with Jenkins and Kramer.

47. Partnership DissolutionPartnership Dissolution
Partner Bonuses from New Partner
Equity of Jenkins $20,000
Equity of Kramer 24,000
Diaz’s Contribution 31,000
Total equity after admitting Diaz$75,000
Diaz’s interest (1/3 x $75,000) $25,000
Diaz’s contribution $31,000
Diaz’s equity after admission 25,000
Bonus paid to Jenkins and Kramer $ 6,000

48. Partnership DissolutionPartnership Dissolution
Partner Bonuses
Mar.1Cash 31 000 00
Alex Diaz, Capital
25 000 00
Marsha Jenkins, Capital
3 000 00
Helen Kramer, Capital
3 000 00 $6000 ÷ 2

49. Partnership DissolutionPartnership Dissolution
Partner Bonuses
After adjusting the market values, the
capital balance of Janice Cowen is
$580,000 and the capital balance of Steve
Dodd is $40,000. Ellen Chua receives a
one-fourth interest in the partnership for a
contribution of $30,000. Before admitting
Chua, Cowen and Dodd shared net
income using a 2 to 1 ratio.

50. Partnership DissolutionPartnership Dissolution
Partner Bonuses to New Partner
Equity of Cowen $ 80,000
Equity of Dodd 40,000
Chua’s Contribution 30,000
Total equity after admitting Chua$150,000
Chua’s interest (1/4 x $150,000)$ 37,500
Chua’s contribution $30,000
Chua’s equity after admission 37,500
Bonus paid to Chua $ 7,500

51. Partnership DissolutionPartnership Dissolution
Partner Bonuses
Mar.1Cash 30 000 00
Janice Cowen, Capital 5 000 00
Steve Dodd, Capital 2 500 00
Ellen Chua, Capital
37 500 00
1/3 x
$7,50
0
2/3 x
$7,50
0

52. Liquidating PartnershipsLiquidating Partnerships
When a partnership goes out of
business, the winding-up
process is called the liquidation
of a partnership.

53. Liquidating PartnershipsLiquidating Partnerships
The sale of the assets is
called realization.

54. Liquidating PartnershipsLiquidating Partnerships
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 $11,000
Noncash Assets 64,000
Liabilities $ 9,000
Jean Farley, Capital 22,000
Brad Greene, Capital 22,000
Alice Hall, Capital 22,000
Total $75,000$75,000

55. Liquidating PartnershipsLiquidating Partnerships
Between April 10 and April 30, 2006,
Farley, Greene, and Hall sell all
noncash assets for $72,000.
Gain on Realization

56. Liquidating PartnershipsLiquidating Partnerships
Balance before realization$11,000$64,000$9,000
Left side of statement
Noncash
Cash Assets Liabilities
Sale of assets and division
of gain +72,000-64,000 —

57. Liquidating PartnershipsLiquidating Partnerships
Balance before realization$22,000$22,000$22,000
Right side of statement
Farley Greene Hall
Capital Capital Capital
Sale of assets and division
of gain +4,000+2,400+1,600
$8,000
gain x .50
$8,000
gain x .30
$8,000
gain x .20

58. Liquidating PartnershipsLiquidating Partnerships
Balance before realization$11,000$64,000$9,000
Left side of statement
Noncash
Cash Assets Liabilities
Sale of assets and division
of gain +72,000–64,000 —
Balance after realization$83,000 $0$9,000

59. Liquidating PartnershipsLiquidating Partnerships
Balance before realization$22,000$22,000$22,000
Right side of statement
Farley Greene Hall
Capital Capital Capital
Sale of assets and division
of gain +4,000 +2,400 +1,600
Balance after realization$26,000$24,400$23,600

60. Liquidating PartnershipsLiquidating Partnerships
The partnership’s liabilities are
paid, $9,000.
Gain on Realization

61. Liquidating PartnershipsLiquidating Partnerships
Left side of statement
Noncash
Cash Assets Liabilities
Balance before realization$11,000$64,000$9,000
Sale of assets and division
of gain +72,000–64,000 —
Balance after realization$83,000$ 0$9,000
Payment of liabilities–9,000 —–9,000

62. Liquidating PartnershipsLiquidating Partnerships
Left side of statement
Noncash
Cash Assets Liabilities
Balance before realization$11,000$64,000$9,000
Sale of assets and division
of gain +72,000–64,000 —
Balance after realization$83,000$ 0$9,000
Payment of liabilities –9,000 —–9,000
Balance after payment $74,000$ 0$ 0

63. Liquidating PartnershipsLiquidating Partnerships
The remaining cash, $74,000,
is paid to each partner in
accordance with the partner’s
capital balance.
Gain on Realization

64. Liquidating PartnershipsLiquidating Partnerships
Left side of statement
Noncash
Cash Assets Liabilities
Balance before realization$11,000$64,000$9,000
Sale of assets and division
of gain +72,000–64,000 —
Balance after realization$83,000$ 0$9,000
Payment of liabilities –9,000 —–9,000
Balance after payment $74,000$ 0$ 0
Partners’ cash distributed–74,000 — —
Final balances $ 0$ 0$ 0

65. Liquidating PartnershipsLiquidating Partnerships
Right side of statement
Balance before realization$22,000$22,000$22,000
Farley Greene Hall
Capital Capital Capital
Sale of assets and division
of gain +4,000 +2,400 +1,600
Balance after realization$26,000$24,400$23,600
Payment of liabilities — — —
Balance after payment$26,000$24,400$23,600
Partners’ cash distributed–26,000–24,400–23,600
Final balances $ 0$ 0$ 0

66. Liquidating PartnershipsLiquidating Partnerships
Sale of Assets
Apr.30Cash 72 000 00
Noncash Assets
64 000 00
Gain on Realization
8 000 00

67. Liquidating PartnershipsLiquidating Partnerships
Division of Gain
Apr.30Gain on Realization 8 000 00
Jean Farley, Capital
4 000 00
Brad Greene, Capital
2 400 00
Alice Hall, Capital
1 600 00

68. Liquidating PartnershipsLiquidating Partnerships
Payment of Liabilities
Apr.30Liabilities 9 000 00
Cash 9 000 00

69. Liquidating PartnershipsLiquidating Partnerships
Distribution of Cash to Partners
Apr.30Jean Farley, Capital 26 000 00
Brad Greene, Capital 24 400 00
Alice Hall, Capital 23 600 00
Cash 74 000 00

70. Liquidating PartnershipsLiquidating Partnerships
Between April 10 and April 30, 2006,
Farley, Greene, and Hall sell all
noncash assets for $44,000.
Loss on RealizationLoss on Realization

71. Liquidating PartnershipsLiquidating Partnerships
Balance before realization$11,000$64,000$9,000
Left side of statement
Noncash
Cash Assets Liabilities
Sale of assets and division
of loss +44,000–64,000 —

72. Liquidating PartnershipsLiquidating Partnerships
Balance before realization$22,000$22,000$22,000
Right side of statement
Farley Greene Hall
Capital Capital Capital
Sale of assets and division
of loss –10,000–6,000–4,000
$20,000
loss x .50
$20,000
loss x .30
$20,000
loss x .20

73. Liquidating PartnershipsLiquidating Partnerships
Balance before realization$11,000$64,000$9,000
Left side of statement
Noncash
Cash Assets Liabilities
Sale of assets and division
of loss +44,000–64,000 —
Balance after realization$55,000 $0$9,000

74. Liquidating PartnershipsLiquidating Partnerships
Balance before realization$22,000$22,000$22,000
Right side of statement
Farley Greene Hall
Capital Capital Capital
Sale of assets and division
of loss –10,000 –6,000 –4,000
Balance after realization$12,000$16,000$18,000

75. Liquidating PartnershipsLiquidating Partnerships
The liabilities of the
partnership are paid, $9,000.
Loss on RealizationLoss on Realization

76. Liquidating PartnershipsLiquidating Partnerships
Left side of statement
Noncash
Cash Assets Liabilities
Balance before realization$11,000$64,000$9,000
Sale of assets and division
of loss +44,000–64,000 —
Balance after realization$55,000$ 0$9,000
Payment of liabilities–9,000 —–9,000

77. Liquidating PartnershipsLiquidating Partnerships
Left side of statement
Noncash
Cash Assets Liabilities
Balance before realization$11,000$64,000$9,000
Sale of assets and division
of loss +44,000–64,000 —
Balance after realization$55,000$ 0$9,000
Payment of liabilities –9,000 —–9,000
Balance after payment $46,000$ 0$ 0

78. Liquidating PartnershipsLiquidating Partnerships
The remaining cash, $46,000,
is paid to each partner in
accordance with the partner’s
capital balance.
Loss on RealizationLoss on Realization

79. Liquidating PartnershipsLiquidating Partnerships
Left side of statement
Noncash
Cash Assets Liabilities
Balance before realization$11,000$64,000$9,000
Sale of assets and division
of loss +44,000–64,000 —
Balance after realization$55,000$ 0$9,000
Payment of liabilities –9,000 —–9,000
Balance after payment $46,000$ 0$ 0
Partners’ cash distributed–46,000 — —
Final balances $ 0$ 0$ 0

80. Liquidating PartnershipsLiquidating Partnerships
Right side of statement
Balance before realization$22,000$22,000$22,000
Farley Greene Hall
Capital Capital Capital
Sale of assets and division
of loss –10,000 –6,000 –4,000
Balance after realization$12,000$16,000$18,000
Payment of liabilities — — —
Balance after payment$12,000$16,000$18,000
Partners’ cash distributed–12,000–16,000–18,000
Final balances $ 0$ 0$ 0

81. Liquidating PartnershipsLiquidating Partnerships
Sale of Assets
Apr.30Cash 44 000 00
Loss on Realization 20 000 00
Noncash Assets
64 000 00

82. Liquidating PartnershipsLiquidating Partnerships
Division of Loss
Brad Greene, Capital 6 000 00
Alice Hall, Capital 4 000 00
Loss on Realization
20 000 00
Apr. 30Jean Farley, Capital 10 000 00

83. Liquidating PartnershipsLiquidating Partnerships
Payment of Liabilities
Apr.30Liabilities 9 000 00
Cash 9 000 00

84. Liquidating PartnershipsLiquidating Partnerships
Distribution to Partners
Apr.30Jean Farley, Capital 12 000 00
Brad Greene, Capital 16 000 00
Alice Hall, Capital 18 000 00
Cash 46 000 00

85. Lifecycle of a BusinessLifecycle of a Business
Business Stage Principal Advantage
Della’s Delights,
Proprietorship
Jeff Jacobi, Proprietor
Form easily: Jacobi forms a
business by obtaining a
local business license and
opening a bank account.
Della’s Delights,
Partnership
Jacobi and Lange,
Partners
Expand capital and
expertise: Jacobi admits a
new partner that contributes
capital and expertise.
Continued

86. Lifecycle of a BusinessLifecycle of a Business
Business Stage Principal Advantage
Della’s Delights, LLCLimit legal liability: The
partnership is changed to an
LLC to limit legal liability
of owners.
Della’s Delights, Inc.Simplify raising capital:
The LLC is changed to a
corporation to raise capital
from the public.Continued

87. Lifecycle of a BusinessLifecycle of a Business
Business StagePrincipal Advantage
Della’s Delights, Inc. a
division of International
Foods, Inc.
Provide exit: The company
is sold for cash.

88. A venture capitalist is an
individual or firm that
provides equity financing
for a new company.

89. The End
Chapter 13Chapter 13