Solution manual accounting 21e by warreni ch 13

Corporation: Limited liability to owners and ease of raising large amounts of equity capital.. The disadvantages of a partnership are its life is limited, each partner has unlimited liab

CHAPTER 13 Accounting for Partnerships and Limited Liability Corporations

CLASS DISCUSSION QUESTIONS

1 Proprietorship: Ease of formation.

Corporation: Limited liability to owners and

ease of raising large amounts of equity

capital

Partnership: Expanded owner expertise and

capital and ease of formation.

Limited liability corporation: Limited liability to

owners.

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 corporation.

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).

5 Equally.

6 No He 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, DiPano may lose more than

one-third of the losses if one partner is unable to

absorb his share of the losses.

7 The statement of stockholders’ equity

discloses the material changes in each

stockholders’ equity account, such as

common stock, paid-in excess of par value,

retained earnings, and treasury stock, for a

specified period.

8 The statement of partners’ equity (for a

partnership) and statement of members’

equity (for a LLC) both show the material

changes in owner’s equity for each ownership person or class for a specified period.

9 The delivery equipment should be recorded

at $15,000, the valuation agreed upon by the partners.

10 The accounts receivable should be recorded

by a debit of $200,000 to Accounts Receivable and a credit of $20,000 to Allowance for Doubtful Accounts.

11 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 partnership will not exactly equal their shares

of net income.

12 a Debit the partner’s drawing account and

credit Cash.

b 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.

c No Payments to partners and the

division of net income are separate The amount of one does not affect the amount of the other.

13 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 are affected.

b By investment, both the total assets and

the total equity of the partnership are creased.

in-14 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

83

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.

15 A new partner who is expected to improve

the fortunes (income) of the partnership

might be given equity in excess of the

amount invested to join the partnership.

16 a Losses and gains on realization are

divided among partners in the

income-sharing 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 result from the inability to

collect from a deficient partner.

17 The different advantages of each

organizational form are related to the natural life cycle of a business For example, during the initial stages of a business, ease of formation may be paramount, which favors a proprietorship As a business grows and succeeds, the need for expertise and capital grows, giving rise to partnerships If limited liability becomes paramount to outside investors, such as venture capitalists, then the business may take the form of a limited liability corporation Lastly, a business may wish to obtain more extensive sources of capital, such as from the investing public In this case, the corporate form is best suited for raising public capital with the help of an underwriter through an initial public offering.

84

Ex 13–1

TENDER HEART GREETING CARDS INC Statement of Stockholders’ Equity For the Year Ended December 31, 2006

Paid-In Common Capital in Stock, Excess Treasury Retained

$2 Par of Par Stock Earnings Total

Balance, Jan 1, 2006 $500,000 $400,000 — $1,075,000 $1,975,000 Issued 50,000 shares

d Salary allowance $40,000 $50,000 $ 90,000 Remaining income (1:1) 15,000 15,000 30,000 Net income $55,000 $65,000 $120,000

e Interest allowance $24,000 $12,000 $ 36,000 Salary allowance 40,000 50,000 90,000 Excess of allowances over income (1:1) (3,000) (3,000) (6,000) Net income $61,000 $59,000 $120,000

Ex 13–4

Moore Knell

a Net income (1:1) $ 90,000 $90,000 $180,000

b Net income (2:1) $120,000 $60,000 $180,000

c Interest allowance $ 24,000 $12,000 $ 36,000 Remaining income (2:3) 57,600 86,400 144,000 Net income $ 81,600 $98,400 $180,000

d Salary allowance $ 40,000 $50,000 $ 90,000 Remaining income (1:1) 45,000 45,000 90,000 Net income $ 85,000 $95,000 $180,000

e Interest allowance $ 24,000 $12,000 $ 36,000 Salary allowance 40,000 50,000 90,000 Remaining income (1:1) 27,000 27,000 54,000 Net income $ 91,000 $89,000 $180,000

Ex 13–5

Williams

Osaka Total Salary allowances $ 40,000 $ 60,000 $ 100,000 Remainder ($120,000)(net loss, $20,000

plus $100,000 salary allowances)

divided equally (60,000) (60,000) (120,000) Net loss $ (20,000) $ 0 $ (20,000)

Ex 13–6

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, Jim’s conclusion was correct, but for the wrong reasons In addition, note that the salary allowances have no impact on the division of income.

Hodges remaining income: ($106,000 – $85,000) × (2/5)

b.

(1)

Income Summary 106,000

L Bennings, Member Equity 44,600

L Hodges, Member Equity 61,400 (2)

L Bennings, Member Equity 32,000

L Hodges, Member Equity 53,000

L Bennings, Drawing 32,000

L Hodges, Drawing 53,000

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 13–8

a.

Daily Call WXXY Radio John Newspaper,

Salary allowance $125,000 $125,000 Interest allowance (8%) $ 12,800 7,600 $ 20,000 40,400 Total allowances $ 12,800 $132,600 $ 20,000 $165,400 Remaining income (4:3:3) 217,840 163,380 163,380 544,600 Net income $230,640 $295,980 $183,380 $710,000 b.

Dec 31, 2006 Income Summary 710,000

WXXY Radio Partners, Member Equity 230,640 John Higgins, Member Equity 295,980 Daily Call Newspaper, LLC, Member

Equity 183,380 Dec 31, 2006 WXXY Radio Partners, Member Equity 12,800

John Higgins, Member Equity 132,600 Daily Call Newspaper, LLC, Member Equity 20,000 WXXY Radio Partners, Drawing 12,800 John Higgins, Drawing 132,600 Daily Call Newspaper, LLC, Drawing 20,000 c.

MEDIA PROPERTIES, LLC Statement of Members’ Equity For the Year Ended December 31, 2006

Radio John Newspaper, Partners Higgins LLC Total

Members' equity, January 1, 2006 $160,000 $ 95,000 $250,000 $ 505,000 Additonal investment during the year 50,000 50,000

$210,000 $ 95,000 $250,000 $ 555,000 Net income for the year 230,640 295,980 183,380 710,000

$440,640 $390,980 $433,380 $1,265,000 Withdrawals during the year 12,800 132,600 20,000 165,400 Members' equity, December 31, 2006 $427,840 $258,380 $413,380 $1,099,600

(2) Walt Bigney, Capital 72,000

Dan Harris, Capital 84,000

Walt Bigney, Drawing 72,000Dan Harris, Drawing 84,000

b

BIGNEY AND HARRIS Statement of Partners’ Equity For the Year Ended December 31, 2006

Bigney Harris Total Capital, January 1, 2006 $ 80,000 $ 95,000 $175,000 Additional investment during the year 10,000 — 10,000

$ 90,000 $ 95,000 $185,000 Net income for the year 80,000 80,000 160,000

$170,000 $175,000 $345,000 Withdrawals during the year 72,000 84,000 156,000 Capital, December 31, 2006 $ 98,000 $ 91,000 $189,000

Ex 13–10

a.

Jan 31 Partner Drawing 20,000,000

Cash 20,000,000 b.

Dec 31 Income Summary 200,000,000

Partner Capital 200,000,000 c.

Dec 31 Partner Capital 240,000,000*

Partner Drawing 240,000,000

*12 months × 20,000,000 d.

Dec 31 Cash 40,000,000

Partner Capital 40,000,000

During the year, the partners withdrew 40 million pounds more than what was earned This represents a distribution of capital beyond the current year’s earnings According to the operating agreement, this difference must be returned

Ex 13–13

a (1) Susan Yu, Capital 25,000

Ben Hardy, Capital 18,000

Ken Mahl 43,000 (2) Cash 35,000

Jeff Wood, Capital 35,000

Cecil Jacobs, Capital 5,000

Maria Estaban, Capital 5,000

Lee White, Capital 55,000

b Cecil Jacobs 56,000

Maria Estaban 54,000

Lee White 55,000

Ex 13–15

a Conway, Member Equity 5,600 1

Patel, Member Equity 8,400 2

Equity of Conway $294,400

Equity of Patel 331,600

Contribution by Truett 340,000

Total equity after admitting Truett $966,000

Truett’s equity interest after admission 30%

Truett’s equity after admission $289,800

Contribution by Truett $340,000

Truett’s equity after admission 289,800

Bonus paid to Conway and Patel $ 50,200

Conway: $50,200 × 2/5 = $20,080

Patel: $50,200 × 3/5 = $30,120

b 2 Cash 190,000

Conway, Member Equity 8,864

Patel, Member Equity 13,296

Truet, Member Equity 212,160 Supporting calculations for the bonus:

Equity of Conway $294,400

Equity of Patel 331,600

Contribution by Truett 190,000

Total equity after admitting Truett $816,000

Truett’s equity interest after admission 26%

Truett’s equity after admission $212,160

Contribution by Truett 190,000

Bonus paid to Truett $ 22,160

Conway: $22,160 × 2/5 = $8,864

Patel: $22,160 × 3/5 = $13,296

Ex 13–16

ANGEL INVESTOR ASSOCIATES Statement of Partnership Equity For the Year Ended December 31, 2006

Total Jan Cara Michael Partner- Strous, Wright, Black, ship Capital Capital Capital Capital Partnership Capital, January 1, 2006 $ 31,500 $ 58,500 $ $ 90,000 Revaluation of assets (3,500) (6,500) (10,000) Admission of Michael Black 2,800 5,200 22,000 30,000 Salary allowance 12,000 12,000 Remaining income 44,800 83,200 32,000 160,000 Less: Partner withdrawals (28,400) (41,600) (16,000) (86,000) Partnership Capital, December 31, 2006 $ 59,200 $ 98,800 $ 38,000 $196,000

Jan Strous: $10,000 × 35% = $3,500 reduction in capital account

Cara Wright: $10,000 × 65% = $6,500 reduction in capital account

Ex 13–16 Concluded

Admission of Michael Black:

Equity of initial partners prior to admission $ 80,000

Contribution by Black 30,000

Total $110,000

Black's equity interest after admission 20%

Black's equity after admission $ 22,000

Contribution by Black $ 30,000

Black's equity after admission 22,000

Bonus paid to Strous and Wright $ 8,000

The bonus is distributed to Strous and Wright according to their income-sharing ratio prior to admitting Black:

Strous: $8,000 × 35% = $2,800

Wright: $8,000 × 65% = $5,200

Net income distribution:

The revised income-sharing ratio is equal to the proportion of the capital balances after admitting Black according to the partnership agreement:

Jan Strous:

000 , 110

$

800 , 30

$

= 28%

Cara Wright:

000 , 110

$

200 , 57

$

= 52%

Michael Black:

000 , 110

$

000 , 22

$

= 20%

Alternatively, the original income-sharing ratios for Strous and Wright could be multiplied by 80% (100% less the 20% sold to Black) to obtain 28% and 52%, respectively Leaving 20% for Black.

These ratios can be multiplied by the $160,000 remaining income ($172,000 –

$12,000 salary allowance to Strous) to distribute the earnings to the respective partner capital accounts.

Withdrawals:

Half of the income distribution for Wright and Black and half of the income distribution plus salary allowance for Strous Strous need not take the salary

allowance as a withdrawal but may allow it to accumulate in the member equity account.

Ex 13–17

a Merchandise Inventory 15,000

Allowance for Doubtful Accounts 3,100 Glenn Otis, Capital 5,100 Tammie Sawyer, Capital 3,400 Joe Parrott, Capital 3,400

b Glenn Otis, Capital 205,100

Cash 55,100 Notes Payable 150,000

Ex 13–18

a The income-sharing ratio is determined by dividing the net income for each member by the total net income Thus, in 2005 the income-sharing ratio is as follows:

Golden Properties, LLC:

000 , 125

$

000 , 50

$

= 40%

Aztec Holdings, Ltd.:

000 , 125

$

000 , 75

$

880 , 106

$

= 32%

Aztec Holdings, Ltd.:

000 , 334

$

320 , 160

$

= 48%

Jason Fields:

000 , 334

$

800 , 66

$

= 20%

000 , 50

$

= 38.5%

Clearly, the distribution to Jason Fields is disproportionably higher while the distributions to Golden Properties and Aztec Holdings are lower than their respective income-sharing ratios Distributions need not be in the same proportion as the income-sharing ratio Members may make withdrawals from the business as long as their member equity remains positive and the operating agreement allows such withdrawals

d Jason Fields provided a $183,750 cash contribution to the business The amount credited to his member equity account is this amount plus his bonus ($20,000), or $203,750.

e The negative entries to Golden Properties and Aztec Holdings are the result of

a bonus paid to Jason Fields.

f Jason Fields acquired a 20% interest in the business, computed as follows:

Jason Fields’ member equity after admission $ 203,750

Golden Properties, LLC, member equity 332,000

Aztec Holdings, Ltd member equity 483,000

Total $1,018,750

Fields’ ownership interest after admission

($203,750 ÷ $1,018,750) 20.00%

Ex 13–19

a.

Cash balance $ 20,000

Sum of capital accounts 25,000

Loss from sale of noncash assets $ 5,000

b and c.

Hires Bellman Capital balances before realization $ 5,000 $ 20,000 Division of loss on sale of noncash assets 2,500 2,500 Balances $ 2,500 $ 17,500 Cash distributed to partners 2,500 17,500 Final balances $ 0 $ 0

Ex 13–20

Goldburg Luce

Capital balances before realization $ 57,000 $ 40,000 Division of loss on sale of noncash assets

($97,000 – $67,000) 15,000 15,000 Capital balances after realization $ 42,000 $ 25,000 Cash distributed to partners 42,000 25,000 Final balances $ 0 $ 0

deficiency $ 20,000 $ 57,500 $ 0

Ex 13–22

a Cash should be distributed as indicated in the following tabulation:

Capital invested $ 175 $ 125 $ — $ 300 Net income + 100 + 100 + 100 + 300 Capital balances and cash

distribution $ 275 $ 225 $ 100 $ 600

b David has a capital deficiency of $60, as indicated in the following tabulation:

Capital invested $ 175 $ 125 $ — $ 300 Net loss – 60 – 60 – 60 – 180 Capital balances $ 115 $ 65 $ 60 Dr $ 120

Ex 13–23

Duncan Tribe Ho Capital balances after realization $(15,000) $ 50,000 $ 40,000 Distribution of partner deficiency 15,000 (10,000) (5,000) Capital balances after deficiency

distribution $ 0 $ 40,000 $ 35,000

Ex 13–24

GIBBS, HILL, AND MANSON Statement of Partnership Liquidation For the Period Ending July 1–29, 20—

Capital

Cash + Assets = Liabilities + (3/6) + (2/6) + (1/6) Balances before realization $ 11,000 $ 85,000 $ 30,000 $ 24,000 $ 28,000 $ 14,000 Sale of assets and division

of loss + 61,000 – 85,000 — – 12,000 – 8,000 – 4,000 Balances after realization $ 72,000 $ 0 $ 30,000 $ 12,000 $ 20,000 $ 10,000 Payment of liabilities – 30,000 — – 30,000 — — — Balances after payment of

liabilities $ 42,000 $ 0 $ 0 $ 12,000 $ 20,000 $ 10,000 Distribution of cash to partners – 42,000 — — – 12,000 – 20,000 – 10,000 Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Ex 13–25

a

CITY SIGNS, LLC Statement of LLC Liquidation For the Period March 1–31, 2006

Member Equity

Cash + Assets = Liabilities + (2/5) + (2/5) + (1/5) Balances before realization $ 4,000 $125,000 $ 44,000 $ 28,000 $ 45,000 $ 12,000 Sale of assets and division

of loss + 96,000 – 125,000 — – 11,600 – 11,600 – 5,800 Balances after realization $100,000 $ 0 $ 44,000 $ 16,400 $ 33,400 $ 6,200 Payment of liabilities – 44,000 — – 44,000 — — — Balances after payment of

liabilities $ 56,000 $ 0 $ 0 $ 16,400 $ 33,400 $ 6,200 Distribution of cash to members – 56,000 — — – 16,400 – 33,400 – 6,200 Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 b.

Ellis, Member Equity 16,400

Roane, Member Equity 33,400

Clausen, Member Equity 6,200

Cash 56,000

PROBLEMS Prob 13–1A

2.

TSAO AND IVENS Balance Sheet November 1, 2005

Assets Current assets:

Liabilities Current liabilities:

Mark Ivens, capital 85,000

Total partners’ equity 155,000 Total liabilities and partners’ equity $174,700

Prob 13–1A Concluded

3.

Oct 31 Income Summary 75,500

E Tsao, Capital 40,000* Mark Ivens, Capital 35,500*

31 E Tsao, Capital 26,000

Mark Ivens, Capital 17,500

E Tsao, Drawing 26,000 Mark Ivens, Drawing 17,500

*Computations:

Tsao Ivens Total Interest allowance $ 7,000 $ 8,500 $ 15,500 Salary allowance 24,000 18,000 42,000 Remaining income (1:1) 9,000 9,000 18,000 Net income $ 40,000 $ 35,500 $ 75,500

a Net income (1:1) $ 75,000 $ 75,000 $ 45,000 $ 45,000

b Net income (2:3) $ 60,000 $ 90,000 $ 36,000 $ 54,000

c Net income (2:1) $ 100,000 $ 50,000 $ 60,000 $ 30,000

d Interest allowance $ 12,000 $ 18,000 $ 12,000 $ 18,000 Remaining allowance (3:2) 72,000 48,000 36,000 24,000 Net income $ 84,000 $ 66,000 $ 48,000 $ 42,000

e Interest allowance $ 12,000 $ 18,000 $ 12,000 $ 18,000 Salary allowance 60,000 30,000 60,000 30,000 Excess of allowances over

income (1:1) (15,000) (15,000) Remaining income (1:1) 15,000 15,000 Net income $ 87,000 $ 63,000 $ 57,000 $ 33,000

f Interest allowance $ 12,000 $ 18,000 $ 12,000 $ 18,000 Salary allowance 60,000 30,000 60,000 30,000 Bonus allowance 12,000

Excess of allowances over

income (1:1) (15,000) (15,000) Remaining income (1:1) 9,000 9,000 Net income $ 93,000 $ 57,000 $ 57,000 $ 33,000

Prob 13–3A

1.

REEVES AND STRANGE Income Statement For the Year Ended December 31, 2006

Professional fees $316,750 Operating expenses:

Salary expense $ 84,500

Depreciation expense—building 10,500

Property tax expense 10,000

Heating and lighting expense 9,900

Reeves Strange Total Capital, January 1, 2006 $ 75,000 $ 50,000 $ 125,000 Additional investment during the year — 5,000 5,000

$ 75,000 $ 55,000 $ 130,000 Net income for the year 89,000 96,000 185,000

$ 164,000 $ 151,000 $ 315,000 Withdrawals during the year 50,000 60,000 110,000 Capital, December 31, 2006 $ 114,000 $ 91,000 $ 205,000

Prob 13–3A Concluded

3.

REEVES AND STRANGE Balance Sheet December 31, 2006

Assets Current assets:

Less accumulated depreciation 22,400 17,600

Total plant assets 140,100 Total assets $ 207,500

Liabilities Current liabilities:

Accounts payable $ 1,000

Salaries payable 1,500

Total liabilities $ 2,500

Partners’ Equity Dan Reeves, capital $ 114,000

Ron Strange, capital 91,000

Total partners’ equity 205,000 Total liabilities and partners’ equity $ 207,500