CHAPTER 12

ACCOUNTING FOR PARTNERSHIPS AND

LIMITED LIABILITY COMPANIES
QUESTION INFORMATION
Number
EO12-1
EO12-2
EO12-3
EO12-4
EO12-5
EO12-6
EO12-7
EO12-8
EO12-9
EO12-10
EO12-11
EO12-12
EO12-13
EO12-14
EO12-15
PE12-1A

Objective
12-1
12-1
12-1
12-1
12-1
12-2
12-3
12-3
12-3
12-3
12-3
12-3
12-3
12-4
12-5
12-2

PE12-1B

12-2

PE12-2A

12-2

PE12-2B

12-2

PE12-3A

12-3

PE12-3B

12-3

PE12-4A
PE12-4B
PE12-5A

12-3
12-3
12-4

PE12-5B

12-4

PE12-6A

12-4

PE12-6B

12-4

Ex12-1

12-2

Ex12-2

12-2

Ex12-3

12-2

Ex12-4

12-2

Description

Journalize partner's
original investment
Journalize partner's
original investment
Dividing partnership
net income
Dividing partnership
net loss
Revalue assets and
contribute assets to a
partnership
Revalue assets and
contribute assets to a
partnership
Partner bonus
Partner bonus
Liquidating
partnerships-gain
Liquidating
partnerships-gain
Liquidating
partnershipsdeficiency
Liquidating
partnershipsdeficiency
Record partner's
original investment
Record partner's
original investment
Dividing partnership
income
Dividing partnership
income

Difficulty
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy

Time
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min

AACSB
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic

AICPA
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Easy
Easy
Easy

5 min
5 min
5 min

Analytic
Analytic
Analytic

FN-Measurement
FN-Measurement
FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Easy

10 min

Analytic

FN-Measurement

Easy

10 min

Analytic

FN-Measurement

Easy

15 min

Analytic

FN-Measurement

Easy

15 min

Analytic

FN-Measurement

167

SS

GL

Number
Ex12-5

Objective
12-2

Ex12-6

12-2

Ex12-7
Ex12-8

12-2
12-2, 12-5

Ex12-9

12-2, 12-3

Ex12-10

12-3

Ex12-11

12-3

Ex12-12

12-3

Ex12-13

12-3

Ex12-14

12-3

Ex12-15

12-3

Ex12-16

12-2, 12-3,
12-5

Ex12-17
Ex12-18

12-3
12-2, 12-3,
12-5

Ex12-19

12-4

Ex12-20

12-4

Ex12-21

12-4

Ex12-22

12-4

Ex12-23

12-4

Ex12-24

12-4

Ex12-25

12-4

Ex12-26

12-2, 12-5

Ex12-27

FAI

Ex12-28

FAI

Pr12-1A

12-2

Pr12-2A

12-2

Description
Dividing partnership
net loss
Negotiating incomesharing ratio
Dividing LLC income
Dividing LLC net
income and statement
of member's equity
Partner income and
withdrawal journal
entries
Admitting new
partners
Admitting new
partners
Admitting new
partners who buy an
interest and contribute
assets
Admitting new partner
who contributes
assets
Admitting new LLC
member
Admitting new partner
with bonus
Partner bonuses,
statement of partners'
equity
Withdrawal of partner
Statement of
members' equity,
admitting new
member
Distribution of cash
upon liquidation
Distribution of cash
upon liquidation
Liquidating
partnerships-capital
deficiency
Distribution of cash
upon liquidation
Liquidating
partnerships-capital
deficiency
Statement of
partnership equity
Statement of LLC
liquidation
Partnership entries
and statement of
partners' equity
Financial analysis and
interpretation
Financial analysis and
interpretation
Entries and balance
sheet for partnership
Dividing partnership

Difficulty
Easy

Time
5 min

AACSB
Analytic

AICPA
FN-Measurement

Moderate

10 min

Analytic

FN-Measurement

Easy
Moderate

10 min
15 min

Analytic
Analytic

FN-Measurement
FN-Measurement

Moderate

15 min

Analytic

FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Moderate

15 min

Analytic

FN-Measurement

Easy

10 min

Analytic

FN-Measurement

Easy

10 min

Analytic

FN-Measurement

Moderate

15 min

Analytic

FN-Measurement

Moderate

15 min

Analytic

FN-Measurement

Moderate

20 min

Analytic

FN-Measurement

Moderate
Difficult

15 min
20 min

Analytic
Analytic

FN-Measurement
FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Easy

15 min

Analytic

FN-Measurement

Easy

10 min

Analytic

FN-Measurement

Easy

5 min

Analytic

FN-Measurement

Moderate

15 min

Analytic

FN-Measurement

Exl

Moderate

15 min

Analytic

FN-Measurement

Exl

Moderate

15 min

Analytic

FN-Measurement

Exl

Easy

10 min

Analytic

FN-Measurement

Easy

10 min

Analytic

FN-Measurement

Moderate

1 hr

Analytic

FN-Measurement

Moderate

1 hr

Analytic

FN-Measurement

168

SS

GL

Exl

Exl

KA

Number

Objective

Pr12-3A

12-2, 12-5

Pr12-4A

12-3

Pr12-5A

12-4

Pr12-6A

12-4

Pr12-1B

12-2

Pr12-2B

12-2

Pr12-3B

12-2, 12-5

Pr12-4B

12-3

Pr12-5B

12-4

Pr12-6B

12-4

SA12-1

12-1

SA12-2

12-2

SA12-3

FAI

SA12-4

FAI

SA12-5

12-1

Description
income
Financial statements
for partnership
Admitting new partner

Difficulty

Time

AACSB

AICPA

SS

Difficult

Analytic

FN-Measurement

Exl

Analytic

FN-Measurement

Statement of
partnership liquidation
Statement of
partnership liquidation
Entries and balance
sheet for partnership
Dividing partnership
income
Financial statements
for partnership
Admitting new partner

Moderate

1 1/2
hr
1 1/2
hr
1 hr

Analytic

FN-Measurement

Exl

Moderate

1 hr

Analytic

FN-Measurement

Exl

Moderate

1 hr

Analytic

FN-Measurement

Exl

Moderate

1 hr

Analytic

FN-Measurement

Difficult

Analytic

FN-Measurement

Analytic

FN-Measurement

Statement of
partnership liquidation
Statement of
partnership liquidation
Partnership
agreement
Dividing partnership
income
Revenue per
employee
Revenue per
employee
Partnership
agreement

Moderate

1 1/2
hr
1 1/2
hr
1 hr

Analytic

FN-Measurement

Exl

Moderate

1 hr

Analytic

FN-Measurement

Exl

Easy

10 min

Ethics

BB-Industry

Easy

10 min

Analytic

FN-Measurement

Moderate

20 min

Analytic

FN-Measurement

Moderate

20 min

Analytic

FN-Measurement

Easy

10 min

Analytic

FN-Measurement

Difficult

Difficult

169

GL

KA

KA

Exl
KA

EYE OPENERS
1. Proprietorship: Ease of formation and
nontaxable entity.
Partnership: Expanded owner expertise and
capital, nontaxable entity, and ease of
formation.
Limited liability company: Limited liability to
owners, expanded access to capital,
nontaxable entity, and ease of formation.
2. The disadvantages of a partnership are its
life is limited, each partner has unlimited
liability, one partner can bind the partnership
to contracts, and raising large amounts of
capital is more difficult for a partnership than
a
limited
liability company.
3. Yes. A partnership may incur losses in
excess of the total investment of all partners.
The
division of losses among the partners would
be made according to their agreement. In
addition, because of the unlimited liability of
each partner for partnership debts, a
particular partner may actually lose a greater
amount than his or her capital balance.
4. The partnership agreement (partnership) or
operating agreement (LLC) establishes the
income-sharing ratio among the partners
(members), amounts to be invested, and
buy-sell agreements between the partners
(members). In addition, for an LLC the
operating agreement specifies if the LLC is
owner-managed or manager-managed.
5. Equally.
6. No. Maholic would have to bear his share of
losses. In the absence of any agreement as
to division of net income or net loss, his
share would be one-third. In addition,
because of the unlimited liability of each
partner, Maholic may lose more than onethird of the losses if one partner is unable to
absorb his share of the losses.
7. The delivery equipment should be recorded
at $10,000, the valuation agreed upon by the
partners.
8. The accounts receivable should be recorded
by a debit of $150,000 to Accounts
Receivable and a credit of $15,000 to
Allowance
for
Doubtful Accounts.
9. Yes. Partnership net income is divided
according to the income-sharing ratio,
regardless of the amount of the withdrawals
by the partners. Therefore, it is very likely
that the partners monthly withdrawals from a

170

10.

11.

12.

13.

14.

partnership will not exactly equal their shares

of net income.
a. Debit the partners drawing account and
credit Cash.
b. No. Payments to partners and the
division of net income are separate. The
amount of one does not affect the
amount of the other.
c. Debit the income summary account for
the amount of the net income and credit
the partners capital accounts for their
respective shares of the net income.
a. By purchase of an interest, the capital
interest of the new partner is obtained
from the old partner, and neither the total
assets nor the total equity of the
partnership is affected.
b. By investment, both the total assets and
the total equity of the partnership are
increased.
It is important to state all partnership assets
in terms of current prices at the time of the
admission of a new partner because failure
to do so might result in participation by the
new partner in gains or losses attributable to
the period prior to admission to the
partnership. To illustrate, assume that A and
B share net income and net loss equally and
operate a partnership that owns land
recorded at and costing $20,000. C is
admitted to the partnership, and the three
partners share in income equally. The day
after C is admitted to the partnership, the
land is sold for $35,000 and, since the land
was not revalued, C receives one-third
distribution of the $15,000 gain. In this case,
C participates in the gain attributable to the
period prior to admission to the partnership.
A new partner who is expected to improve
the fortunes (income) of the partnership,
through such things as reputation or skill,
might be given equity in excess of the
amount invested to join the partnership.
a. Losses and gains on realization are
divided among partners in the incomesharing ratio.
b. Cash is distributed to the partners
according to their ownership
claims, as indicated by the credit
balances in their capital accounts,
after taking into consideration the
potential deficiencies that may

15.

result from the inability to collect

from a deficient partner.
The statement of partners equity (for a
partnership) and statement of members
equity (for an LLC) both show the material
changes in owners equity for each
ownership person or class for a specified
period.

171

PRACTICE EXERCISES
PE 121A
Cash...................................................................................
Inventory............................................................................
Land....................................................................................
Notes Payable..............................................................
Conway Shelton, Capital............................................

58,000
45,000
68,000
20,000
151,000

PE 121B
Cash...................................................................................
Accounts Receivable........................................................
Patent.................................................................................
Accounts Payable.......................................................
Allowance for Doubtful Accounts.............................
Ashley Wells, Capital..................................................

15,000
22,000
280,000
8,000
1,000
308,000

PE 122A
Distributed to Adkins:
Annual salary.....................................................................................
Interest (12% $120,000).................................................................
Remaining income............................................................................
Total distributed to Adkins...............................................................

$ 49,000
14,400
55,900*
$119,300

*[$180,000 $49,000 $14,400 (12% $40,000)] 50%

PE 122B
Distributed to Lodge:
Annual salary.....................................................................................
Interest (10% $100,000).................................................................
Deduct excess of allowances over income....................................
Total distributed to Lodge................................................................
*[$60,000 $54,000 $10,000 (10% $200,000)] 2/3

$ 54,000
10,000
(16,000)*
$ 48,000

PE 123A
a. Equipment....................................................................
Stuart Townley, Capital.........................................
Ayesha Starr, Capital.............................................

15,000

b. Cash..............................................................................
Devin Morris, Capital.............................................

28,000

10,000
5,000
28,000

PE 123B
a. Land..............................................................................
Leon Browne, Capital............................................
Craig Little, Capital................................................

25,000

b. Craig Little, Capital......................................................

Lane Tway, Capital.................................................

15,250

12,500
12,500
15,250*

*($18,000 + $12,500) 50%

PE 124A
Equity of Masterson..........................................................................
Nutley contribution...........................................................................
Total equity after admitting Nutley..................................................
Nutleys equity interest.....................................................................
Nutleys equity after admission.......................................................
Nutleys contribution........................................................................
Bonus paid to Nutley........................................................................

$ 90,000
50,000
$ 140,000

40%
$ 56,000
50,000
$ 6,000

PE 124B
Equity of Porter.................................................................................
Billingss contribution......................................................................
Total equity after admitting Billings................................................
Billingss equity interest...................................................................
Billingss equity after admission.....................................................

$ 420,000
200,000
$ 620,000

30%
$ 186,000

Billingss contribution......................................................................
Billingss equity after admission.....................................................
Bonus paid to Porter.........................................................................

$ 200,000
186,000
$ 14,000

PE 125A
Chows equity prior to liquidation........................................
Realization of asset sales......................................................
Book value of assets ($18,000 + $25,000 + $1,000)............
Gain on liquidation.................................................................
Chows share of gain (50% $2,000)...................................
Chows cash distribution......................................................

$ 18,000
$ 46,000
44,000
$ 2,000
1,000
$ 19,000

PE 125B
Dickenss equity prior to liquidation....................................
Realization of asset sales......................................................
Book value of assets ($55,000 + $45,000 + $10,000)..........
Loss on liquidation................................................................
Dickenss share of loss (50% $35,000).............................
Dickenss cash distribution..................................................

$ 55,000
$ 75,000
110,000
$ 35,000
(17,500)
$ 37,500

PE 126A
a. Martins equity prior to liquidation.................................
Realization of asset sales................................................
Book value of assets........................................................
Loss on liquidation...........................................................
Martins share of loss (50% $23,000)...........................
Martins deficiency...........................................................

$ 8,000
$ 5,000
28,000
$ 23,000
(11,500)
$ (3,500)

b. $5,000. $20,000 $11,500 share of loss $3,500 Martin deficiency, also equals
the amount realized from asset sales.

PE 126B
a. Mees equity prior to liquidation.....................................
Realization of asset sales................................................
Book value of assets........................................................
Loss on liquidation...........................................................
Mees share of loss (50% x $110,000).............................
Mees deficiency...............................................................

$ 40,000
$ 50,000
160,000
$110,000
(55,000)
$ (15,000)

b. $50,000. $120,000 $55,000 share of loss $15,000 Mee deficiency, also equal
to the amount realized from asset sales.

EXERCISES
Ex. 121
Cash........................................................................................
Accounts Receivable..............................................................
Merchandise Inventory............................................................
Equipment...............................................................................
Allowance for Doubtful Accounts.......................................
Lamar Kline, Capital..........................................................

10,000
118,000
74,300
67,000
8,100
261,200

Ex. 122
Cash...................................................................................
Accounts Receivable........................................................
Land....................................................................................
Equipment.........................................................................
Allowance for Doubtful Accounts.............................
Accounts Payable.......................................................
Notes Payable..............................................................
Ron Maples, Capital....................................................

30,000
65,000
165,000
10,000
5,000
18,000
45,000
202,000

Ex. 123
Haley

Manos

$ 75,000
112,500
68,400
67,500
73,500

$75,000
37,500
81,600
82,500
76,500

Haley

Manos

Total

a. Net income (1:1)...........................................

$ 75,000

$ 75,000

$150,000

b. Net income (3:1)...........................................

$112,500

$ 37,500

$150,000

c. Interest allowance........................................
Remaining income (2:3)...............................
Net income....................................................

$ 18,000
50,400
$ 68,400

$ 6,000
75,600
$ 81,600

$ 24,000
126,000
$150,000

d. Salary allowance..........................................
Remaining income (1:1)...............................
Net income....................................................

$ 45,000
22,500
$ 67,500

$ 60,000
22,500
$ 82,500

$105,000
45,000
$150,000

e. Interest allowance........................................
Salary allowance..........................................
Remaining income (1:1)...............................
Net income....................................................

$ 18,000
45,000
10,500
$ 73,500

$ 6,000
60,000
10,500
$ 76,500

$ 24,000
105,000
21,000
$150,000

a.
b.
c.
d.
e.

...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
Details

Ex. 124
Haley

Manos

$120,000
180,000
104,400
112,500
118,500

$120,000
60,000
135,600
127,500
121,500

Haley

Manos

Total

a. Net income (1:1).................................................

$120,000

$120,000

$240,000

b. Net income (3:1).................................................

$180,000

$ 60,000

$240,000

c. Interest allowance..............................................
Remaining income (2:3)....................................
Net income..........................................................

$ 18,000
86,400
$104,400

$ 6,000
129,600
$135,600

$ 24,000
216,000
$240,000

d. Salary allowance................................................
Remaining income (1:1)....................................
Net income..........................................................

$ 45,000
67,500
$112,500

$ 60,000
67,500
$127,500

$105,000
135,000
$240,000

e. Interest allowance..............................................
Salary allowance................................................
Remaining income (1:1)....................................
Net income..........................................................

$ 18,000
45,000
55,500
$118,500

$ 24,000
105,000
111,000
$240,000

a.
b.
c.
d.
e.

...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
Details

6,000
60,000
55,500
$121,500

Ex. 125

Salary allowances...........................................
Remainder (net loss, $25,000 plus $75,000
salary allowances) divided equally..........
Net loss............................................................

Curt
Kelly

Greg
Kaufman

$ 45,000

$ 30,000

$ 75,000

(50,000)
$ (5,000)

(50,000)
$ (20,000)

(100,000)
$ (25,000)

Total

Ex. 126
The partners can divide net income in any ratio that they wish. However, in the
absence of an agreement, net income is divided equally between the partners.
Therefore, Jans conclusion was correct, but for the wrong reasons. In addition,
note that the monthly drawings have no impact on the division of income.

Ex. 127
a.
Net income: $132,000

Salary allowance.............................................
Remaining income..........................................
Net income.......................................................

Gardner

Ross

Total

$58,000
19,200
$77,200

$42,000
12,800
$54,800

$100,000
32,000
$132,000

Gardner remaining income: ($132,000 $100,000) 3/5

Ross remaining income: ($132,000 $100,000) 2/5
b.
(1)
Income Summary..................................................................
L. Gardner, Member Equity............................................
L. Ross, Member Equity..................................................

132,000
77,200
54,800

(2)
L. Gardner, Member Equity..................................................
L. Ross, Member Equity.......................................................
L. Gardner, Drawing........................................................
L. Ross, Drawing.............................................................

58,000
42,000
58,000
42,000

Note: The reduction in members equity from withdrawals would be disclosed on

the statement of members equity but does not affect the allocation of net income
in part (a) of this exercise.

Ex. 128
a.

Salary allowance.......................
Interest allowance.....................
Remaining income (4:3:3)........
Net income.................................

KXT Radio
Partners

Daily Sun
Rachel Newspaper,
Sizemore
LLC

$ 19,2001
158,000
$177,200

$139,800
3,2002
118,500
$261,500

$ 12,8003
118,500
$131,300

Total
$139,800
35,200
395,000
$570,000

8% $240,000
8% $40,000
3
8% $160,000
2

b.
Dec. 31, 2008

Dec. 31, 2008

Income Summary.............................................. 570,000

KXT Radio Partners, Member Equity........
Rachel Sizemore, Member Equity.............
Daily Sun Newspaper, LLC, Member
Equity......................................................
KXT Radio Partners, Member Equity.............. 19,200
Rachel Sizemore, Member Equity................... 143,000
Daily Sun Newspaper, LLC, Member Equity.. 12,800
KXT Radio Partners, Drawing....................
Rachel Sizemore, Drawing.........................
Daily Sun Newspaper, LLC, Drawing........

177,200
261,500
131,300

19,200
143,000
12,800

c.
MEDIA PROPERTIES, LLC
Statement of Members Equity
For the Year Ended December 31, 2008
KXT
Daily Sun
Radio
Rachel Newspaper,
Partners Sizemore
LLC
Members equity, January 1, 2008.......
Additional investment during the year
Net income for the year.........................

$240,000 $ 40,000
50,000
$290,000 $ 40,000
177,200 261,500
$467,200 $301,500

Total

$160,000 $ 440,000
50,000
$160,000 $ 490,000
131,300
570,000
$291,300 $1,060,000

Withdrawals during the year................

Members equity, December 31, 2008.

19,200 143,000
$448,000 $158,500

12,800
175,000
$278,500 $ 885,000

Ex 129
a.
Jan. 31

Partner, Drawing..................................
Cash.................................................

25,000,000

Income Summary.................................
Partner, Capital...............................

350,000,000

Partner, Capital.....................................
Partner, Drawing.............................

300,000,000*

25,000,000

b.
Dec. 31

350,000,000

c.
Dec. 31

300,000,000

*12 months 25,000,000

Ex. 1210
a. and b.
Charles Shivers, Capital.................................................
Theresa Pepin, Capital..............................................
$120,000 1/3

40,000
40,000

Note: The sale to Shivers is not a transaction of the partnership; so, the
sales price is not considered in this journal entry.

Ex. 1211
a. $1,172,000 ($2,450,000,000/2,090), rounded
b. $172,000 ($360,000,000/2,090), rounded
c. A new partner might contribute more than $172,000 because of goodwill
attributable to the firms reputation, future income potential, and a strong
client base, etc.

Ex. 1212
a.

b.

(1) Kris Perry, Capital (20% $100,000)......................

Melvin Newman, Capital (25% $90,000)...............
Paul Lester, Capital.............................................

20,000
22,500

(2) Cash...........................................................................
Steve Hurd, Capital.............................................

40,000

Kris Perry.............................................................
Melvin Newman...................................................
Paul Lester...........................................................
Steve Hurd...........................................................

42,500
40,000
80,000
67,500
42,500
40,000

Ex. 1213
a.

b.

Cash.................................................................................
Mike Heil, Capital............................................................
Alan Delong, Capital......................................................
Felix Estavez, Capital................................................

50,000
6,000
6,000

Mike Heil...............................................................
Alan Delong.........................................................
Felix Estavez........................................................

69,000
79,000
62,000

62,000

Ex. 1214
a. Medical Equipment...........................................................
Dobbs, Member Equity...............................................
Fox, Member Equity....................................................
1
2

20,000
8,0001
12,0002

$20,000 2/5 = $8,000

$20,000 3/5 = $12,000

b. 1. Cash..............................................................................
Dobbs, Member Equity..........................................
Fox, Member Equity...............................................
Kopp, Member Equity............................................

310,000
9,400
14,100
286,500

Supporting calculations for the bonus:

Equity of Dobbs...........................................
Equity of Fox...............................................
Contribution by Kopp.................................
Total equity after admitting Kopp.............
Kopps equity interest after admission....
Kopps equity after admission..................

$308,000
337,000
310,000
$955,000

30%
$286,500

Contribution by Kopp.................................
Kopps equity after admission..................
Bonus paid to Dobbs and Fox...................

$310,000
286,500
$ 23,500

Dobbs: $23,500 2/5 = $9,400

Fox: $23,500 3/5 = $14,100
b. 2. Cash..............................................................................
Dobbs, Member Equity...............................................
Fox, Member Equity....................................................
Kopp, Member Equity............................................
Supporting calculations for the bonus:
Equity of Dobbs...........................................
Equity of Fox...............................................
Contribution by Kopp.................................
Total equity after admitting Kopp.............
Kopps equity interest after admission....
Kopps equity after admission..................
Contribution by Kopp.................................
Bonus paid to Kopp....................................
Dobbs: $30,000 2/5 = $12,000
Fox: $30,000 3/5 = $18,000

$308,000
337,000
175,000
$820,000

25%
$205,000
175,000
$ 30,000

175,000
12,000
18,000
205,000

Ex. 1215
a. J. Trifilio, Capital.........................................................
K. Graham, Capital......................................................
Equipment.........................................................

3,000
3,000

b. 1. Cash........................................................................
J. Trifilio, Capital....................................................
K. Graham, Capital.................................................
L. Holden, Capital.............................................

50,000
3,400
3,400

6,000

56,800

Supporting calculations for the bonus:

Equity of Trifilio......................................................................
Equity of Graham...................................................................
Contribution by Holden.........................................................
Total equity after admitting Holden......................................
Holdens equity interest after admission.............................
Holdens equity after admission...........................................
Contribution by Holden.........................................................
Bonus paid to Holden............................................................

$ 87,000
147,000
50,000
$284,000

20%
$ 56,800
50,000
$ 6,800

The bonus to Holden is debited equally between Trifilios and Grahams

capital accounts.
b. 2. Cash........................................................................
J. Trifilio, Capital...............................................
K. Graham, Capital...........................................
L. Holden, Capital.............................................

125,000
8,650
8,650
107,700

Supporting calculations for the bonus:

Equity of Trifilio......................................................................
Equity of Graham...................................................................
Contribution by Holden.........................................................
Total equity after admitting Holden......................................
Holdens equity interest after admission.............................
Holdens equity after admission...........................................
Contribution by Holden.........................................................
Holdens equity after admission...........................................
Bonus paid to Trifilio and Graham.......................................

$ 87,000
147,000
125,000
$359,000

30%
$107,700
$125,000
107,700
$ 17,300

The bonus to Trifilio and Graham is credited equally between Trifilios and
Grahams capital accounts.

Ex. 1216
ANGEL INVESTOR ASSOCIATES
Statement of Partnership Equity
For the Year Ended December 31, 2008
Jan
Lisa
Sarah
Strous, Lankford, Rogers,
Capital
Capital
Capital

Total
Partnership
Capital

Partnership Capital, January 1, 2008........ $ 36,000 $ 84,000

$120,000
Admission of Sarah Rogers.......................

$ 30,000
30,000
Salary allowance......................................... 25,000
25,000
Remaining income...................................... 27,600
64,400 23,000 115,000
Less: Partner withdrawals......................... (13,800)
(32,200) (11,500) (57,500)
Partnership Capital, December 31, 2008. . $ 74,800 $116,200 $ 41,500 $232,500
Admission of Sarah Rogers:
Equity of initial partners prior to admission..................
Contribution by Rogers....................................................
Total....................................................................................
Rogerss equity interest after admission.......................
Rogerss equity after admission.....................................
Contribution by Rogers....................................................
No bonus...........................................................................

$120,000
30,000
$150,000

20%
$ 30,000
30,000
$
0

Net income distribution:

The income-sharing ratio is equal to the proportion of the capital balances after
admitting Rogers according to the partnership agreement:
$36 ,000

Jan Strous: $150 ,000 = 24%

$84 ,000

Lisa Lankford: $150 ,000 = 56%

$30 ,000

Sarah Rogers: $150 ,000 = 20%

These ratios can be multiplied by the $115,000 remaining income ($140,000
$25,000 salary allowance to Strous) to distribute the earnings to the respective
partner capital accounts.
Withdrawals:

Half of the remaining income is distributed to the three partners. Strous need not
take the salary allowance as a withdrawal but may allow it to accumulate in the
member equity account.

Ex. 1217
a.

Merchandise Inventory..................................................
Allowance for Doubtful Accounts...........................
Glenn Powell, Capital...............................................
Tammie Sawyer, Capital..........................................
Joe Patel, Capital......................................................
1
2

b.

6,200
10,2001
6,8002
6,8002

$23,800 3/7
$23,800 2/7

Glenn Powell, Capital.....................................................

Cash...........................................................................
Notes Payable...........................................................
1

30,000

270,2001
105,200
165,000

$260,000 + $10,200

Ex. 1218
a.

The income-sharing ratio is determined by dividing the net income for each
member by the total net income. Thus, in 2007, the income-sharing ratio is as
follows:
$70 ,000

Utah Properties, LLC: $280 ,000 = 25%

$210 ,000

Aztec Holdings, Ltd.: $280 ,000 = 75%

Or a 1:3 ratio
b. Following the same procedure as in (a):
$78 ,400

Utah Properties, LLC: $392 ,000 = 20%

$254 ,800

Aztec Holdings, Ltd.: $392 ,000 = 65%

$58 ,800

Cleveland Porter: $392 ,000 = 15%

c. Cleveland Porter provided a $287,500 cash contribution to the business. The
amount credited to his member equity account is this amount less a $20,000
bonus paid to the other two members, or $267,500.

Ex. 1218

Concluded

d. The positive entries to Utah Properties and Aztec Holdings are the result of a
bonus paid by Cleveland Porter.
e. Cleveland Porter acquired a 20% interest in the business, computed as
follows:
Cleveland Porters contribution..........................
Utah Properties, LLC, member equity................
Aztec Holdings, Ltd., member equity.................
Total.......................................................................

$ 287,500
530,000
520,000
$1,337,500

Porters ownership interest after admission

($267,500 $1,337,500)........................................

20.00%

Ex. 1219
a.
Cash balance...................................................
Sum of capital accounts.................................
Loss from sale of noncash assets................

Capital balances before realization...............

b. Division of loss on sale of noncash assets
Balances...........................................................
c. Cash distributed to partners..........................
Final balances.................................................
1

$ 24,000
35,000
$ 11,000
Pitt

Leon

$ 15,000
5,5001
$ 9,500
9,500
$
0

$ 20,000
5,5001
$ 14,500
14,500
$
0

Boling

Bishop

$ 43,000

$ 57,000

12,000
$ 31,000
31,000
$
0

12,000
$ 45,000
45,000
$
0

$11,000/2

Ex. 1220
Capital balances before realization.....................
Division of loss on sale of noncash assets
[($100,000 $76,000)/2].....................................
Capital balances after realization.........................
Cash distributed to partners.................................
Final balances........................................................

Ex. 1221
a.

Deficiency

b.

$64,000 ($21,000 + $57,500 $14,500)

c.

Cash..................................................................................
Shelby, Capital...........................................................

Capital balances after realization.......

Receipt of partner deficiency..............
Capital balances after eliminating
deficiency........................................

14,500
14,500

Mawby

White

Shelby

$ 21,000

$ 57,500

$(14,500) Dr.
14,500

$ 21,000

$ 57,500

Ex. 1222
a.

Cash should be distributed as indicated in the following tabulation:

Capital invested.................................
Net income.........................................
Capital balances and cash
distribution.....................................
b.

Seth

Kerr

Driver

Total

$ 225
+ 200

$ 150
+ 200

$
+ 200

$ 375
+ 600

$ 425

$ 350

$ 200

$ 975

Driver has a capital deficiency of $40, as indicated in the following tabulation:

Capital invested.................................
Net loss..............................................
Capital balances................................

Seth

Kerr

$ 225
40
$ 185

$ 150
40
$ 110

Driver

Total

$
40
$ 40 Dr.

$ 375
120
$ 255

Ex. 1223
Heinz
Capital balances after realization..............
Distribution of partner deficiency.............
Capital balances after deficiency
distribution............................................
1
2

$18,000 2/3
$18,000 1/3

Dicer

Ho

$(18,000)
18,000

$ 70,000
(12,000)1

$ 45,000
(6,000)2

$ 58,000

$ 39,000

Ex. 1224
DILLS, GORDON, AND CHAVEZ
Statement of Partnership Liquidation
For the Period Ending July 129, 2008
Capital

Cash
Balances before realization..............
Sale of assets and division
of loss.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment of
liabilities.........................................
Cash distributed to partners............
Final balances....................................

Noncash
Assets = Liabilities +

Dills
(3/6)

Gordon
(2/6)

Chavez
(1/6)

$ 42,000

$ 90,000

$ 45,000

$ 32,000

$ 40,000

$ 15,000

+ 66,000
$108,000
45,000

90,000
$
0

$ 45,000
45,000

12,000
$ 20,000

8,000
$ 32,000

4,000
$ 11,000

$ 63,000
63,000
$
0

$ 20,000
20,000
$
0

$ 32,000
32,000
$
0

$ 11,000
11,000
$
0

Ex. 1225
a.
CITY SIGNS, LLC
Statement of LLC Liquidation
For the Period March 131, 2008
Member Equity

Cash
Balances before realization..............
Sale of assets and division
of gain.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment of
liabilities.........................................
Distribution of cash to members.....
Final balances....................................

Noncash
Assets = Liabilities +

Gilley
(2/5)

Hughes
(2/5)
+

Moussa
(1/5)

$ 14,000

$ 126,000

$ 35,000

$ 19,000

$ 54,000

$ 32,000

+ 146,000
$ 160,000
35,000

126,000
$
0

$ 35,000
35,000

+ 8,000
$ 27,000

+ 8,000
$ 62,000

+ 4,000
$ 36,000

$ 125,000
125,000
$
0

$ 27,000
27,000
$
0

$ 62,000
62,000
$
0

$ 36,000
36,000
$
0

b.
Gilley, Member Equity.....................................................
Hughes, Member Equity.................................................
Moussa, Member Equity.................................................
Cash.............................................................................

27,000
62,000
36,000
125,000

Ex. 1226
a.
(1)

(2)

Income Summary.............................................................
Dal Polivka, Capital.....................................................
Amanda Pratt, Capital................................................

180,000

Dal Polivka, Capital..........................................................

Amanda Pratt, Capital......................................................
Dal Polivka, Drawing...................................................
Amanda Pratt, Drawing..............................................

65,000
76,000

90,000
90,000

65,000
76,000

b.
POLIVKA AND PRATT
Statement of Partners Equity
For the Year Ended December 31, 2008

Capital, January 1, 2008.................................

Additional investment during the year.........
Net income for the year..................................
Withdrawals during the year..........................
Capital, December 31, 2008............................

Dal
Polivka

Amanda
Pratt

Total

$105,000
15,000
$120,000
90,000
$210,000
65,000
$145,000

$135,000

$135,000
90,000
$225,000
76,000
$149,000

$240,000
15,000
$255,000
180,000
$435,000
141,000
$294,000

Ex. 1227
a. Revenue per professional staff, 2004:

Revenue per professional staff, 2005:

$6,876,000,000
= $301,000
22,841
$ 7,814 ,000
= $296,000
26 ,401

b. The revenues increased between the two years from $6,876 million to $7,814
million, or 13.6% [($7,814 $6,876)/$6,876]. Revenue growth has been strong,
mostly resulting from Sarbanes-Oxley work. However, the number of
employees has grown at a faster rate, from 22,841 to 26,401, or 15.6% [(26,401
22,841)/22,841]. As a result, the revenue per professional staff employee has
dropped from $301,000 to $296,000. This slight loss in efficiency is probably
to be expected. Public accounting firms have had difficulty finding employees
for the emerging Sarbanes-Oxley work. From 2004 to 2005, they have
aggressively hired employees to bring the workforce in line with the demand
for work. Prior to this time, the firm was relying heavily on overtime.

Ex. 1228
a. Revenue per employee, 2007:

$32,500,000
= $125,000
260

Revenue per employee, 2008:

$38,000,000
= $100,000
380

b. Revenues increased between the two years; however, the number of

employees has increased at a faster rate. Thus, the revenue per employee
declined from $125,000 in 2007 to $100,000 in 2008. This indicates that the
efficiency of the firm has declined in the two years. This is likely the result of
the expansion. That is, the large increase in the employment base is the likely
result of the expansion into the four new cities. These new employees may
need to be trained and thus are not as efficient in their jobs as the more
experienced employees in the existing cities. Often, a business will suffer
productivity losses in the midst of significant expansion because of the
inexperience of the new employees.

PROBLEMS
Prob. 121A
1.
May

Cash.......................................................................
Merchandise Inventory........................................
Crystal Polles, Capital....................................

16,500
43,500

Cash.......................................................................
Accounts Receivable...........................................
Equipment.............................................................
Allowance for Doubtful Accounts.................
Accounts Payable...........................................
Notes Payable..................................................
Doug Kovac, Capital.......................................

13,000
19,100
53,300

60,000

1,400
14,000
20,000
50,000

2.
POLLES AND KOVAC
Balance Sheet
May 1, 2007
Assets
Current assets:
Cash......................................................................
Accounts receivable...........................................
Less allowance for doubtful accounts..............
Merchandise inventory.......................................
Total current assets.......................................
Plant assets:
Equipment............................................................
Total assets...............................................................

$ 29,500
$ 19,100
1,400

17,700
43,500
$ 90,700
53,300
$ 144,000

Liabilities
Current liabilities:
Accounts payable...............................................
Notes payable......................................................
Total liabilities...........................................................
Partners Equity
Crystal Polles, capital..............................................
Doug Kovac, capital.................................................
Total partners equity...............................................
Total liabilities and partners equity.......................

$ 14,000
20,000
$ 34,000
$ 60,000
50,000
110,000
$ 144,000

Prob. 121A

Concluded

3.
Apr. 30

30

Income Summary..................................................
Crystal Polles, Capital....................................
Doug Kovac, Capital.......................................

74,000

Crystal Polles, Capital..........................................

Doug Kovac, Capital.............................................
Crystal Polles, Drawing..................................
Doug Kovac, Drawing.....................................

22,000
28,000

35,000*
39,000*

22,000
28,000

*Computations:
Polles
Interest allowance...............................................
Salary allowance.................................................
Remaining income (1:1)......................................
Net income...........................................................
1
2

10% $60,000
10% $50,000

Kovac

Total

6,0001 $ 5,0002 $ 11,000

20,000
25,000
45,000
9,000
9,000
18,000
$ 35,000 $ 39,000 $ 74,000
$

Prob. 122A
(1)
$114,000

(2)
$210,000

Plan

Lange

Lopez

Lange

Lopez

a.
b.
c.
d.
e.
f.

$57,000
85,500
38,000
66,600
49,100
48,200

$57,000
28,500
76,000
47,400
64,900
65,800

$105,000
157,500
70,000
114,600
97,100
86,600

$105,000
52,500
140,000
95,400
112,900
123,400

......................................................
......................................................
......................................................
......................................................
......................................................
......................................................

Details
$114,000
Lange

$210,000

Lopez

Lange

Lopez

a.

Net income (1:1)......................... $ 57,000

$ 57,000

$ 105,000

$ 105,000

b.

Net income (3:1)......................... $ 85,500

$ 28,500

$ 157,500

$ 52,500

c.

Net income (1:2)......................... $ 38,000

$ 76,000

$ 70,000

$ 140,000

d.

Interest allowance...................... $ 28,800

Remaining Income (1:1).............
37,800
Net income.................................. $ 66,600

9,600
37,800
$ 47,400

$ 28,800
85,800
$ 114,600

e.

Interest allowance...................... $ 28,800

Salary allowance........................
35,000
Excess of allowances over
income (1:1).............................
(14,700)
Remaining income (1:1).............
Net income.................................. $ 49,100

$ 28,800
35,000

33,300
$ 97,100

33,300
$ 112,900

Interest allowance...................... $ 28,800

Salary allowance........................
35,000
Bonus allowance........................
Excess of allowances over
income (1:1).............................
(15,600)
Remaining income (1:1).............
Net income.................................. $ 48,200

f.

1
2

20% ($114,000 $105,000)

20% ($210,000 $105,000)

9,600
70,000

9,600
85,800
$ 95,400
9,600
70,000

(14,700)
$ 64,900

9,600 $ 28,800
70,000
35,000
1,8001

9,600
70,000
21,0002

(15,600)
$ 65,800

22,800
$ 86,600

22,800
$ 123,400

Prob. 123A
1.
SATO AND KOENING
Income Statement
For the Year Ended December 31, 2008
Professional fees....................................................................
Expenses:
Salary expense................................................................
Depreciation expensebuilding...................................
Property tax expense......................................................
Heating and lighting expense........................................
Supplies expense............................................................
Depreciation expenseoffice equipment....................
Miscellaneous expense..................................................
Total expenses............................................................
Net income..............................................................................
Peter
Sato
Division of net income:
Salary allowance.........................................
Interest allowance.......................................
Remaining income......................................
Net income........................................................
*$95,000 10%
**($65,000 $8,000) 10%

$ 40,000
9,500*
12,400
$ 61,900

$297,450
$132,300
10,500
7,000
6,300
2,850
2,800
5,700
167,450
$130,000
May
Koening

Total

$ 50,000
$ 90,000
5,700**
15,200
12,400
24,800
$ 68,100
$ 130,000

2.
SATO AND KOENING
Statement of Partners Equity
For the Year Ended December 31, 2008

Capital, January 1, 2008...................................

Additional investment during the year...........
Net income for the year...................................
Withdrawals during the year...........................
Capital, December 31, 2008.............................

Peter
Sato

May
Koening

Total

$ 95,000

$ 95,000
61,900
$ 156,900
50,000
$ 106,900

$ 57,000
8,000
$ 65,000
68,100
$ 133,100
70,000
$ 63,100

$ 152,000
8,000
$ 160,000
130,000
$ 290,000
120,000
$ 170,000

Prob. 123A

Concluded

3.
SATO AND KOENING
Balance Sheet
December 31, 2008
Assets
Current assets:
Cash..............................................................
Accounts receivable...................................
Supplies.......................................................
Total current assets..............................
Plant and equipment:
Land..............................................................
Building........................................................
$ 130,000
Less accumulated depreciation...........
69,200
Office equipment.........................................
Less accumulated depreciation...........
Total plant assets.............................
Total assets.......................................................

$ 30,000
38,900
1,900
$ 70,800
$ 25,000
60,800

$ 39,000
21,500

17,500
103,300
$ 174,100

Liabilities
Current liabilities:
Accounts payable.......................................
Salaries payable..........................................
Total liabilities...................................................

2,100
2,000
$

4,100

Partners Equity
Peter Sato, capital............................................
May Koening, capital........................................
Total partners equity.......................................
Total liabilities and partners equity...............

$ 106,900
63,100
170,000
$ 174,100

Prob. 124A
1. Apr. 30 Asset Revaluations.............................................
Accounts Receivable....................................
Allowance for Doubtful Accounts..................
*[($34,000 $2,400) 5%] $900

3,080

30 Asset Revaluations.............................................
Merchandise Inventory..................................

3,000

30 Accumulated DepreciationEquipment............
Equipment..........................................................
Asset Revaluations.......................................
**
$240,080 $180,000

80,000
60,080**

2. May

2,400
680*

3,000

140,080

30 Asset Revaluations.............................................
Prad Kumar, Capital......................................
Carol Grigg, Capital......................................

134,000

1 Carol Grigg, Capital............................................

Sara Culver, Capital......................................

55,000

1 Cash...................................................................
Sara Culver, Capital......................................

25,000

67,000
67,000

55,000
25,000

Prob. 124A

Concluded

3.
KUMAR, GRIGG, AND CULVER
Balance Sheet
May 1, 2008
Assets
Current assets:
Cash..............................................................
Accounts receivable...................................
Less allowance for doubtful accounts.....
Merchandise inventory...............................
Prepaid insurance.......................................
Total current assets..............................
Plant assets:
Equipment....................................................
Total assets.......................................................

$ 31,800
$ 31,600
1,580

30,020
60,000
2,100
$123,920
240,080
$364,000

Liabilities
Current liabilities:
Accounts payable.......................................
Notes payable..............................................
Total liabilities...................................................

$ 12,000
20,000
$ 32,000

Partners Equity
Prad Kumar, capital..........................................
Carol Grigg, capital..........................................
Sara Culver, capital..........................................
Total partners equity.......................................
Total liabilities and partners equity...............
1
2

$100,000 + $67,000
$73,000 + $67,000 $55,000

$167,0001
85,0002
80,000
332,000
$364,000

Prob. 125A
1.
DANIELS, BURTON, AND RAMARIZ
Statement of Partnership Liquidation
For Period July 329, 2008
Capital

Cash
Balances before realization..............
Sale of assets and division
of loss.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment of liabilities
Receipt of deficiency........................
Balances.............................................
Cash distributed to partners............
Final balances....................................
2.

Noncash
Assets = Liabilities +

Daniels
Burton
(50%) + (25%)

9,500

$ 84,000

$ 30,000

$ 27,000

4,500

+
$

$
+
$

54,000
63,500
30,000
33,500
3,000
36,500
36,500
0

84,000
$
0

$
0

$
0

$
0

$ 30,000
30,000
$
0

$
0

$
0

15,000
$ 12,000

$ 12,000

$ 12,000
12,000
$
0

7,500
$ (3,000)

$ (3,000)
+ 3,000
$
0

$
0

Ramariz
(25%)
$ 32,000
7,500
$ 24,500

$ 24,500

$ 24,500
24,500
$
0

The $3,000 deficiency of Burton would be divided between the other partners, Daniels and Ramariz, in their
income-sharing ratio (2:1, respectively). Therefore, Daniels would absorb 2/3 of the $3,000 deficiency, or
$2,000, and Ramariz would absorb 1/3 of the $3,000 deficiency, or $1,000.

Prob. 126A
1.
ALLEN, DEE, AND ITO
Statement of Partnership Liquidation
For Period October 130, 2008

Capital

Cash
Balances before realization..............
Sale of assets and division
of gain.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment
of liabilities.....................................
Cash distributed to partners............
Final balances....................................

Noncash
+ Assets = Liabilities +

Allen
(2/5)

Dee
(2/5)

Ito
(1/5)

$ 13,000

$ 179,000

$ 50,000

$ 55,000

$ 75,000

$ 12,000

+ 224,000
$ 237,000
50,000

179,000
$
0

$ 50,000
50,000

+ 18,000
$ 73,000

+ 18,000
$ 93,000

+ 9,000
$ 21,000

$ 187,000
187,000
$
0

$ 73,000
73,000
$
0

$ 93,000
93,000
$
0

$ 21,000
21,000
$
0

Prob. 126A

Concluded

2.
ALLEN, DEE, AND ITO
Statement of Partnership Liquidation
For Period October 130, 2008
Capital

Cash
Balances before realization..............
Sale of assets and division
of loss.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment
of liabilities.....................................
Receipt of deficiency........................
Balances.............................................
Cash distributed to partners............
Final balances....................................

Noncash
Assets = Liabilities +

Allen
(2/5)

Dee
(2/5)

Ito
(1/5)

$ 13,000

$ 179,000

$ 50,000

$ 55,000

$ 75,000

$ 12,000

+ 109,000
$ 122,000
50,000

179,000
$
0

$ 50,000
50,000

28,000
$ 27,000

28,000
$ 47,000

14,000
$ (2,000)

$ 72,000
+ 2,000
$ 74,000
74,000
$
0

$ 27,000

$ 27,000
27,000
$
0

$ 47,000

$ 47,000
47,000
$
0

$ (2,000)
+ 2,000
$
0

$
0

Prob. 121B
1.
Nov.

1 Cash........................................................................
Merchandise Inventory..........................................
E. Hoffman, Capital...........................................

9,000
16,000

1 Cash........................................................................
Accounts Receivable.............................................
Merchandise Inventory..........................................
Equipment...............................................................
Allowance for Doubtful Accounts..................
Accounts Payable.............................................
Notes Payable...................................................
Mark Torres, Capital.........................................

10,600
22,000
31,000
38,000

25,000

900
7,300
3,400
90,000

2.
HOFFMAN AND TORRES
Balance Sheet
November 1, 2007
Assets
Current assets:
Cash............................................................
Accounts receivable..................................
Less allowance for doubtful accounts....
Merchandise inventory.............................
Total current assets.............................
Plant assets:
Equipment..................................................
Total assets.....................................................

$ 19,600
$ 22,000
900

Liabilities
Current liabilities:
Accounts payable......................................
Notes payable............................................
Total liabilities.................................................
Partners Equity
E. Hoffman, capital..........................................
Mark Torres, capital........................................
Total partners equity......................................
Total liabilities and partners equity.............

21,100
47,000
$ 87,700
38,000
$125,700

$ 7,300
3,400
$ 10,700
$ 25,000
90,000
115,000
$125,700

Prob. 121B

Concluded

3.
Oct. 31 Income Summary...................................................
E. Hoffman, Capital...........................................
Mark Torres, Capital.........................................

95,500

31 E. Hoffman, Capital................................................
Mark Torres, Capital..............................................
E. Hoffman, Drawing........................................
Mark Torres, Drawing.......................................

20,000
12,000

58,000*
37,500*

20,000
12,000

*Computations:
Interest allowance...........................................
Salary allowance.............................................
Remaining income (1:1).................................
Net income.......................................................
1
2

10% $250,000
10% $90,000

Hoffman

Torres

Total

$ 2,5001
48,000
7,500
$ 58,000

$ 9,0002
21,000
7,500
$ 37,500

$ 11,500
69,000
15,000
$ 95,500

Prob. 122B
(1)
$135,000
LaRue
Small

Plan
a.
b.
c.
d.
e.
f.

....................................................
....................................................
....................................................
....................................................
....................................................
....................................................

$ 67,500
54,000
90,000
80,200
74,600
83,600

$ 67,500
81,000
45,000
54,800
60,400
51,400

(2)
$60,000
LaRue
Small
$ 30,000
24,000
40,000
35,200
37,100
38,600

$ 30,000
36,000
20,000
24,800
22,900
21,400

Details
$135,000

$60,000

LaRue

Small

LaRue

Small

a.

Net income (1:1).........................

$ 67,500

$ 67,500

$ 30,000

$ 30,000

b.

Net income (2:3).........................

$ 54,000

$ 81,000

$ 24,000

$ 36,000

c.

Net income (2:1).........................

$ 90,000

$ 45,000

$ 40,000

$ 20,000

d.

Interest allowance......................
Remaining income (3:2).............
Net income..................................

1,600
78,600
$ 80,200

2,400
52,400
$ 54,800

1,600
33,600
$ 35,200

e.

Interest allowance......................
Salary allowance........................
Remaining income (1:1).............
Net income..................................

1,600
30,000
43,000
$ 74,600

2,400
15,000
43,000
$ 60,400

1,600
30,000
5,500
$ 37,100

f.

Interest allowance......................
Salary allowance........................
Bonus allowance........................
Remaining income (1:1).............
Net income..................................

1
2

20% ($135,000 $45,000)

20% ($60,000 $45,000)

1,600
30,000
18,0001
34,000
$ 83,600

2,400
15,000

34,000
$ 51,400

1,600
30,000
3,0002
4,000
$ 38,600

2,400
22,400
$ 24,800
2,400
15,000
5,500
$ 22,900
2,400
15,000

4,000
$ 21,400

Prob. 123B
1.
WARRICK AND MURPHY
Income Statement
For the Year Ended December 31, 2008
Professional fees..................................................................
Expenses:
Salary expense................................................................
Depreciation expensebuilding...................................
Property tax expense......................................................
Heating and lighting expense........................................
Supplies expense............................................................
Depreciation expenseoffice equipment.....................
Miscellaneous expense..................................................
Total expenses...........................................................
Net income.............................................................................

$465,000
$305,800
6,800
2,400
9,400
2,100
4,200
4,300
335,000
$130,000

Dan
Warrick
Division of net income:
Salary allowance.........................................
Interest allowance.......................................
Remaining income......................................
Net income........................................................

$ 40,000
11,400*
7,100
$ 58,500

Ron
Murphy

Total

$ 50,000
$ 90,000
14,400**
25,800
7,100
14,200
$ 71,500
$ 130,000

*$95,000 12%
**($140,000 $20,000) 12%

2.
WARRICK AND MURPHY
Statement of Partners Equity
For the Year Ended December 31, 2008

Capital, January 1, 2008...................................

Additional investment during the year...........
Net income for the year...................................
Withdrawals during the year...........................
Capital, December 31, 2008.............................

Dan
Warrick

Ron
Murphy

$ 95,000

$ 95,000
58,500
$ 153,500
45,000
$ 108,500

$ 120,000
20,000
$ 140,000
71,500
$ 211,500
50,000
$ 161,500

Total
$ 215,000
20,000
$ 235,000
130,000
$ 365,000
95,000
$ 270,000

Prob. 123B

Concluded

3.
WARRICK AND MURPHY
Balance Sheet
December 31, 2008

Assets
Current assets:
Cash..............................................................
Accounts receivable...................................
Supplies.......................................................
Total current assets..............................
Plant assets:
Land..............................................................
Building........................................................
Less accumulated depreciation...........
Office equipment.........................................
Less accumulated depreciation...........
Total plant assets.............................
Total assets.......................................................

$ 12,500
31,800
1,400
$ 45,700
$140,000
$110,000
46,900

63,100

$ 46,000
19,200

26,800
229,900
$275,600

Liabilities
Current liabilities:
Accounts payable.......................................
Salaries payable..........................................
Total liabilities...................................................

1,600
4,000
$

5,600

Partners Equity
Dan Warrick, capital.........................................
Ron Murphy, capital.........................................
Total partners equity.......................................
Total liabilities and partners equity...............

$108,500
161,500
270,000
$275,600

Prob. 124B
1.

May 31

Asset Revaluations.....................................
Accounts Receivable............................
Allowance for Doubtful Accounts........

3,300
2,500
800*

*[($26,500 $2,500) 5%] $400

31
31

31

2.

June 1
1

Merchandise Inventory...............................
Asset Revaluations...............................

9,000

Accumulated DepreciationEquipment. .
Equipment..............................................
Asset Revaluations...............................

34,200

Asset Revaluations.....................................
Adrian Knox, Capital.............................
Lisa Oaks, Capital..................................

37,900

Lias Oaks, Capital.......................................

Todd Aguero, Capital............................

30,000

Cash..............................................................
Todd Aguero, Capital............................

40,000

9,000
2,000
32,200
18,950
18,950
30,000
40,000

Prob. 124B

Concluded

3.
KNOX, OAKS, AND AGUERO
Balance Sheet
June 1, 2008
Assets
Current assets:
Cash..............................................................
Accounts receivable...................................
Less allowance for doubtful accounts.....
Merchandise inventory...............................
Prepaid insurance.......................................
Total current assets..............................
Plant assets:
Equipment....................................................
Total assets.......................................................

$ 52,300
$ 24,000
1,200

22,800
98,000
4,200
$177,300
124,000
$301,300

Liabilities
Current liabilities:
Accounts payable.......................................
Notes payable..............................................
Total liabilities...................................................

$ 34,400
30,000
$ 64,400

Partners Equity
Adrian Knox, capital.........................................
Lisa Oaks, capital.............................................
Todd Aguero, capital........................................
Total partners capital......................................
Total liabilities and partners capital..............
1
2

$85,000 + $18,950
$74,000 + $18,950 $30,000

$103,9501
62,9502
70,000
236,900
$301,300

Prob. 125B
1.
NICHOLS, NEWBY, AND PATEL
Statement of Partnership Liquidation
For the Period September 1030, 2008
Capital

Cash
Balances before realization..............
Sale of assets and division
of loss.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment of liabilities
Receipt of deficiency........................
Balances.............................................
Cash distributed to partners............
Final balances....................................

Noncash
Assets = Liabilities +

Nichols
Newby
(25%) + (25%)

4,300

$ 73,700

$ 12,000

$ 32,200

5,400

+
$

$
+
$

47,300
51,600
12,000
39,600
1,200
40,800
40,800
0

73,700
$
0

$
0

$
0

$
0

$ 12,000
12,000
$
0

$
0

$
0

6,600
$ 25,600

$ 25,600

$ 25,600
25,600
$
0

6,600
$ (1,200)

$ (1,200)
+ 1,200
$
0

$
0

Patel
(50%)
$ 28,400
13,200
$ 15,200

$ 15,200

$ 15,200
15,200
$
0

2. The $1,200 deficiency of Newby would be divided between the other partners, Nichols and Patel, in their income-sharing ratio (1:2 respectively). Therefore, Nichols would absorb 1/3 of the $1,200 deficiency, or
$400.00, and Patel would absorb 2/3 of the $1,200 deficiency, or $800.00.

Prob. 126B
1.
STREET, RHODES, AND FLYNN
Statement of Partnership Liquidation
For Period June 329, 2008
Capital

Cash
Balances before realization..............
Sale of assets and division
of gain.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment
of liabilities.....................................
Cash distributed to partners............
Final balances....................................

Noncash
Assets = Liabilities +

Street
(1/5)

Rhodes
(2/5)

Flynn
(2/5)

$ 43,000

$ 234,000

$ 60,000

$ 16,000

$ 78,000

$ 123,000

+ 300,000
$ 343,000
60,000

234,000
$
0

$ 60,000
60,000

+ 13,200
$ 29,200

+ 26,400
$ 104,400

+ 26,400
$ 149,400

$ 283,000
283,000
$
0

$ 29,200
29,200
$
0

$ 104,400
104,400
$
0

$ 149,400
149,400
$
0

Prob. 126B

Concluded

2.
STREET, RHODES, AND FLYNN
Statement of Partnership Liquidation
For Period June 329, 2008

Capital

Cash
Balances before realization..............
Sale of assets and division
of loss.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment
of liabilities.....................................
Receipt of deficiency........................
Balances.............................................
Cash distributed to partners............
Final balances....................................

Noncash
+ Assets = Liabilities +

Street
(1/5)

Rhodes
+
(2/5)

Flynn
(2/5)

$ 43,000

$ 234,000

$ 60,000

$ 16,000

$ 78,000

$ 123,000

+ 106,000
$ 149,000
60,000

234,000
$
0

$ 60,000
60,000

25,600
$ (9,600)

51,200
$ 26,800

51,200
$ 71,800

$ 89,000
+ 9,600
$ 98,600
98,600
$
0

$ (9,600)
+ 9,600
$
0

$
0

$ 26,800

$ 26,800
26,800
$
0

$ 71,800

$ 71,800
71,800
$
0

0
0

SPECIAL ACTIVITIES
SA 121
This scenario highlights one of the problems that arises in partnerships:
attempting to align contribution with income division. Often, disagreements are
based upon honest differences of opinion. However, in this scenario, there is
evidence that Tate was acting unethically. Tate apparently made no mention of
his plans to scale back once the partnership was consummated. As a result,
Crowe
agreed
to
an
equal
division of income based on the assumption that Tates past efforts would project
into the future, while in fact, Tate had no intention of this. As a result, Crowe is
now providing more effort, while receiving the same income as Tate. This is
clearly not sustainable in the long term. Tate does not appear to be concerned
about this inequity. Thus, the evidence points to some duplicity on Tates part.
Essentially, he knows that he is riding on Crowes effort and had planned it that
way.
Crowe could respond to this situation by either withdrawing from the partnership
or changing the partnership agreement. One possible change would be to provide
a partner salary based on the amount of patient billings. This salary would be
highly associated with the amount of revenue brought into the partnership, thus
avoiding disputes associated with unequal contribution to the firm.

SA 122
A good solution to this problem would be to divide income in three steps:
1. Provide interest on each partners capital balance.
2. Provide a monthly salary for each partner.
3. Divide the remainder according to a partnership formula.
With this approach, the return on capital and effort will be separately calculated in
the income division formula before applying the percentage formula. Thus, Wise
will receive a large interest distribution based on the large capital balance, while
Sanchez should receive a large salary distribution based on the larger service
contribution. The return on capital and salary allowances should be based on
prevailing market rates. If both partners are pleased with their return on capital
and effort, then the remaining income could be divided equally among them.

SA 123
a.

Deloitte & Touche.................................................

Ernst & Young.......................................................
PricewaterhouseCoopers....................................
KPMG.....................................................................

Revenue
per
Partner

Revenue per
Professional
Staff

$2,677,570
2,755,500
2,358,636
2,596,215

$339,170
334,223
244,649
346,789

*Revenue per partner is determined by dividing the total revenue by the

number of partners for each firm, adjusting the revenues for the fact that
they are expressed in millions in the table. Revenue per partner is
determined as follows:
Deloitte & Touche revenue per partner:

$6,876,000 ,000
= $2,677,570
2,568

**Likewise, the revenue per professional staff is determined by dividing the

total revenue by the number of professional staff, adjusting the revenues for
the fact that they are expressed in millions in the table. Revenue per
professional staff is determined as follows:
Deloitte & Touche revenue per professional staff:

$6,876,000 ,000
= $339,170
20,273

b. The amount earned per partner is not significantly different between the four
firms. Ernst & Young has the highest revenue per partner, while
PricewaterhouseCoopers (PWC) has the lowest. PWCs revenue per partner is
about 14% below the highest revenue per partner firm, Ernst & Young
[$2,755,500 $2,358,636)/$2,755,500]. The revenue per professional staff is
significantly lower for PWC. PWC revenue per professional staff member is
29% below the highest revenue per professional firm, KPMG LLP [($346,789
$244,649)/$346,789].
Indeed, PWC appears to be somewhat of an outlier in its revenue earned per
professional staff. Together these data indicate that PWC may not be
operating its firm as efficiently as the other three firms. The mix of services
offered by the firms does not appear to impact these numbers. It is interesting
to note that only Deloitte & Touche is significantly more involved in
management
advisory
services (MAS) than the other three firms. The other three firms have sold
their MAS operations in order to better conform to the Sarbanes-Oxley Act,
which prohibited audit clients from using MAS services from the same firm.
Deloitte & Touche has decided not to sell its consulting practice.

SA 124
a. A key distinction between a partnership and a corporation is that all of the
partners (owners) are not only investors but also work in the partnership. The
partners provide both capital and sweat equity. This is a key distinction that
provides insight about the performance of the firm. The expected income
from the partnership is given as the country average, or $260,000.
The following is what each partner actually earned from the partnership.
Allocation of partnership income ($44,000,000 200 partners) = $220,000 per
partner
Note that the partners earnings are less than what might be expected from
the expected, or average, income. Thus, the partnership has performed below
the partners expectations.
b. The income statement indicates some large litigation losses. These losses
appear to be the major reason for the partnerships poor performance.
Without the losses, the partnership net income allocation would have been
$295,000 [($44,000,000 + $15,000,000) 200]. The $295,000 exceeds the
market-based compensation of $260,000 per year. In addition, the staff
professional salaries of $80,000 per year ($120,000,000 1,500) is slightly
higher than average ($75,000). This would also have led to a smaller income
to the partners than might have been expected.

SA 125
When developing an LLC (or partnership), the operating (or partnership)
agreement is a critical part of establishing a business. Each party must consider
the
various
incentives of each individual in the LLC. For example, in this case, one party,
Dave Lester, is providing all of the funding, while the other two parties are
providing
expertise and talent. This type of arrangement can create some natural conflicts
because the interests of an investor might not be exactly the same as those
operating the LLC. Specifically, you would want to advise Lester that not all
matters should be settled by majority vote. Such a provision would allow the two
noninvesting
members to vote as a block to the detriment of Lester. For example, the salaries
for the two working members could be set by their vote, so that little profit would
be left to be distributed. This would essentially keep Lesters return limited to the
10%
preferred return. Lester should insist that salary allowances require unanimous
approval of all members.
A second issue is the division of partnership income. The suggested agreement
is for all the partners to share the remaining income, after the 10% preferred
return, equally. Lester should be counseled to consider all aspects of the LLC
contribution to determine if this division is equitable. There are many
considerations including the amount of investment, risk of the venture, degree of
expertise of noninvesting partners, and degree of exclusivity of noninvesting
members effort contribution (unique skills or business connections, for
example). Often, the simple assumption of equal division is not appropriate.
In addition, it is sometimes best to require even working members to have an
investment in the LLC, even if it is small, so that they are sensitive to the
perspective of financial loss.