CHAPTER 12

ACCOUNTING FOR PARTNERSHIPS AND

LIMITED LIABILITY COMPANIES

DISCUSSION QUESTIONS

1. The main advantages for:

a. Proprietorship: Ease of formation and nontaxable entity.
b. Partnership: Expanded owner expertise and capital, nontaxable entity, and moderate
complexity of formation.
c. Limited liability company: Limited liability to owners, expanded access to capital,
nontaxable entity, and moderate complexity of formation.
2. The disadvantages of a partnership are that 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 is made according to their agreement. In addition,
because of the unlimited liability of each partner for partnership debts, a particular partner may
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 admission and
withdrawal of partners (members). In addition, for an LLC, the operating agreement specifies
whether the LLC is owner-managed or manager-managed.
5. 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 have to bear more than one-third of the losses
if one partner is unable to absorb his or her share of the losses.
6. 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 equal their shares of net income exactly.
7. a. Debit the partner’s 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 revenue accounts, credit the expense accounts, and credit the partners’ capital
accounts for their respective shares of the net income.
8. 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.

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

DISCUSSION QUESTIONS (Continued)

9. 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 because the land was not revalued, C receives a 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.
10. 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.

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

PRACTICE EXERCISES
PE 12-1A
Cash 20,000
Accounts Receivable 45,000
Patent 92,000
Accounts Payable 14,000
Allowance for Doubtful Accounts 3,000
Holly Renfro, Capital 140,000

PE 12-1B
Cash 36,000
Inventory 42,000
Land 175,000
Notes Payable 35,000
Austin Fisher, Capital 218,000

PE 12-2A
Distributed to Chen and Monroe:
Chen Monroe Total
Annual salary allowance……………………… $35,000 $ 0 $35,000
Interest allowance……………………………… 3,600 1 5,600 2 9,200
Total…………………………………………… $38,600 $ 5,600 $44,200
Remaining income……………………………… 17,200 3 8,600 4 25,800
Net income………….….………………………… $55,800 $14,200 $70,000
1
$90,000 × 4%
2
$140,000 × 4%
3
($70,000 – $35,000 – $9,200) × 2/3
4
($70,000 – $35,000 – $9,200) × 1/3

Chen: $55,800
Monroe: $14,200

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

PE 12-2B
Distributed to Prado and Nicks:
Prado Nicks Total
Annual salary……………………………………… $10,000 $28,000 $38,000
1
Interest……………………………………………… 1,000 2,500 2 3,500
Total……………………………………………… $11,000 $30,500 $41,500
3
Deduct excess of allowances over income 5,750 5,750 11,500
Net income………………………………………… $ 5,250 $24,750 $30,000
1
$20,000 × 5%
2
$50,000 × 5%
3
($30,000 – $38,000 – $3,500) × 50%

Prado: $5,250
Nicks: $24,750

PE 12-3A
a. Land 50,000
Tony Vale, Capital 25,000
Ennis Leighton, Capital 25,000
($130,000 – $80,000) × 50%.

b. Ennis Leighton, Capital 30,500

Craig Roberts, Capital 30,500
($36,000 + $25,000) × 50%.

PE 12-3B
a. Equipment 9,000
Kevin Camden, Capital [($39,000 – $30,000) × 2/3] 6,000
Chloe Sayler, Capital 3,000

b. Cash 60,000
Demarco Lee, Capital 60,000

12-4
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

PE 12-4A
Equity of Gomez…………………………………………………………………… $240,000
Banks’s contribution……………………………………………………………… 380,000
Total equity after admitting Banks……………………………………………… $620,000
Banks’s equity interest…………………………………………………………… × 60 %
Banks’s equity after admission………………………………………………… $372,000
Banks’s contribution……………………………………………………………… $380,000
Banks’s equity after admission………………………………………………… 372,000
Bonus paid to Gomez……………………………………………………………… $ 8,000

PE 12-4B
Equity of Hiro……………………………………………………………………… $75,000
Marone’s contribution…………………………………………………………… 20,000
Total equity after admitting Marone…………………………………………… $95,000
Marone’s equity interest………………………………………………………...… × 40 %
Marone’s equity after admission………………………………………………… $38,000
Marone’s contribution…………………………………………………………… 20,000
Bonus paid to Marone…………………………………………………………… $18,000

PE 12-5A
Joyce’s equity prior to liquidation……………………………… $50,000
Realization of asset sales……………………………………… $190,000
Book value of assets (liabilities + owner's equity)
($50,000 + $105,000 + $10,000)……………………………… 165,000
Gain on liquidation………………………………………………… $ 25,000
Joyce’s share of gain (50% × $25,000)………………………… 12,500
Joyce’s cash distribution………………………………………… $62,500

PE 12-5B
Manning’s equity prior to liquidation………………………… $240,000
Realization of asset sales……………………………………… $410,000
Book value of assets (liabilities + owner's equity)
($240,000 + $150,000 + $80,000)…………………………… 470,000
Loss on liquidation……………………………………………… $ (60,000)
Manning’s share of loss [50% × ($60,000)]…………………… (30,000)
Manning’s cash distribution…………………………………… $210,000

12-5
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

PE 12-6A
a. Barns’s equity prior to liquidation……………………………… $ 55,000
Realization of asset sales………………………………………… $ 40,000
Book value of assets (sum of capital accounts)*…………… 160,000
Loss on liquidation………………………………………………… $(120,000)
Barns’s share of loss [50% × ($120,000)]……………………… (60,000)
Barns’s deficiency………………………………………………… $ (5,000)
* $105,000 + $55,000

b. $40,000 ($105,000 − $60,000 share of loss − $5,000 Barns’s deficiency; also equals the
amount realized from asset sales)

PE 12-6B
a. Bonilla’s equity prior to liquidation…………………………… $ 185,000
Realization of asset sales………………………………………… $ 30,000
Book value of assets (sum of capital accounts)*…………… 430,000
Loss on liquidation………………………………………………… $(400,000)
Bonilla’s share of loss [50% × ($400,000)]…………………… (200,000)
Bonilla’s deficiency………………………………………………… $ (15,000)
* $185,000 + $245,000

b. $30,000 ($245,000 – $200,000 share of loss – $15,000 Bonilla’s deficiency; also, equals
the amount realized from asset sales)

PE 12-7A
$12,375,000
a. 20Y4: = $165,000 per employee
75 employees

$15,400,000
20Y5: = $175,000 per employee
88 employees

b. Niles and Cohen, CPAs grew revenues by $3,025,000 ($15,400,000 – $12,375,000), or

24.4% ($3,025,000 ÷ $12,375,000). The number of employees expanded by 13, or 17.3%
(13 ÷ 75). The growth in revenue was more than the growth in the number of
employees; thus, the revenue per employee improved between the two years. The
firm is more efficient in generating revenues from its staff resources between the
two years.

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

PE 12-7B
$1,800,000
a. 20Y1: = $150,000 per employee
12 employees

$1,440,000
20Y2: = $160,000 per employee
9 employees

b. Eclipse Architects reduced revenues by $360,000 ($1,800,000 – $1,440,000), or 20%

($360,000 ÷ $1,800,000). The number of employees declined by 3, or 25% (3 ÷ 12). The
decline in revenue was less than the decline in the number of employees; thus, the
revenue per employee improved between the two years. The firm is more efficient in
generating revenues from its staff resources between the two years.

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

EXERCISES
Ex. 12-1
Cash 20,000
Accounts Receivable* 140,000
Merchandise Inventory 101,700
Equipment 81,200
Allowance for Doubtful Accounts 4,400
Kimberly Payne, Capital 338,500
* $145,000 – $5,000

Ex. 12-2
Cash 65,000
Accounts Receivable 125,000
Land 320,000
Equipment 34,800
Allowance for Doubtful Accounts 9,500
Accounts Payable 24,800
Notes Payable 76,000
Hannah Freeman, Capital 434,500

12-8
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-3
Hawes Albright
a. ………………………………………………………………………… $145,000 $145,000
b. ………………………………………………………………………… 217,500 72,500
c. ………………………………………………………………………… 120,900 169,100
d. ………………………………………………………………………… 140,500 149,500
e. ………………………………………………………………………… 144,000 146,000

Details: Hawes Albright Total

a. Net income (1:1)………………………………… $145,000 $145,000 $290,000
b. Net income (3:1)………………………………… $217,500 $ 72,500 $290,000
c. Interest allowance……………………………… $ 10,5001 $ 3,500 2 $ 14,000
Remaining income (2:3)………………………… 110,400 165,600 276,000
Net income………………………………………… $120,900 $169,100 $290,000
d. Salary allowance………………………………… $ 36,000 $ 45,000 $ 81,000
Remaining income (1:1)………………………… 104,500 104,500 209,000
Net income………………………………………… $140,500 $149,500 $290,000
e. Interest allowance……………………………… $ 10,5001 $ 3,500 2 $ 14,000
Salary allowance………………………………… 36,000 45,000 81,000
Remaining income (1:1)………………………… 97,500 97,500 195,000
Net income………………………………………… $144,000 $146,000 $290,000
1
$210,000 × 5%
2
$70,000 × 5%

12-9
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-4
Hawes Albright
a. ……………………………………………………………………… $52,000 $52,000
b. ……………………………………………………………………… 78,000 26,000
c. ……………………………………………………………………… 46,500 57,500
d. ……………………………………………………………………… 47,500 56,500
e. ……………………………………………………………………… 51,000 53,000

Details: Hawes Albright Total

a. Net income (1:1)………………………………… $52,000 $52,000 $104,000
b. Net income (3:1)………………………………… $78,000 $26,000 $104,000
c. Interest allowance……………………………… $10,500 1 $ 3,5002 $ 14,000
Remaining income (2:3)……………………… 36,000 54,000 90,000
Net income……………………………………… $46,500 $57,500 $104,000
d. Salary allowance………………………………… $36,000 $45,000 $ 81,000
Remaining income (1:1)……………………… 11,500 11,500 23,000
Net income……………………………………… $47,500 $56,500 $104,000
e. Interest allowance……………………………… $10,5001 $ 3,5002 $ 14,000
Salary allowance………………………………… 36,000 45,000 81,000
Remaining income (1:1)……………………… 4,500 4,500 9,000
Net income……………………………………… $51,000 $53,000 $104,000
1
$210,000 × 5%
2
$70,000 × 5%

Ex. 12–5
Leigh Byron
Meadows Leef Total
Salary allowances………………………………… $ 35,000 $ 25,000 $ 60,000
Remainder (net loss, $20,000 plus $60,000
salary allowances) divided equally…………… (40,000) (40,000) (80,000)
Net loss……………………………………………… $ (5,000) $(15,000) $(20,000)

12-10
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-6
a. The partners can divide net income in any ratio they wish. However, in the
absence of an agreement, net income is divided equally between the partners.
Therefore, Wanda’s conclusion was correct but for the wrong reasons. In addition,
note that the monthly drawings have no impact on the division of income. These
drawings are not the same as a salary allowance, which is part of a formal income-
sharing agreement.
b. An income-sharing agreement could be designed to credit each partner’s capital
account for her respective share of income. For example, an income-sharing
agreement could be designed to credit Wanda for interest on her capital contribution,
whereas a salary allowance could be designed to credit Ava for the greater effort she
puts into the partnership. After deducting for these items, the remaining income
could be divided equally.

Ex. 12-7
a. Net income: $148,000
Farley Clark Total
Salary allowance………………… $40,000 $30,000 $ 70,000
Remaining income……………… 46,800 31,200 78,000
Net income………………………… $86,800 $61,200 $148,000
Farley’s remaining income: ($148,000 – $70,000) × 3/5
Clark’s remaining income: ($148,000 – $70,000) × 2/5

b. (1) Revenues 668,000

Expenses 520,000
Martin Farley, Member Equity 86,800
Ashley Clark, Member Equity 61,200

(2) Martin Farley, Member Equity 40,000

Ashley Clark, Member Equity 30,000
Martin Farley, Drawing 40,000
Ashley Clark, Drawing 30,000

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

the statement of members’ equity.
c. If the net income of the LLC was less than the sum of the salary allowances, both
members would still be credited with their salary allowances. From this amount, each
partner would deduct his or her share of the excess of the total salary allowance
over the net income. Thus, the difference between the net income and total salary
allowances would be allocated to each partner as a deduction, according to the
income-sharing ratio.

12-11
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-8
a. Observer
WLKT Madison Newspaper,
Partners Sanders LLC Total
Salary allowance……………… $ 55,000 $ 55,000
3
Interest allowance…………… $ 20,000 1 4,000 2 $16,000 40,000
Remaining income (4:3:3)…… 106,000 79,500 79,500 265,000
Net income……………………… $126,000 $138,500 $95,500 $360,000
1
10% × $200,000
2
10% × $40,000
3 10% × $160,000

b. 20Y2
Dec. 31 Revenues 1,260,000
Expenses 900,000
WLKT Partners, Member Equity 126,000
Madison Sanders, Member Equity 138,500
Observer Newspaper, LLC,
Member Equity 95,500

20Y2
Dec. 31 WLKT Partners, Member Equity 20,000
Madison Sanders, Member Equity* 59,000
Observer Newspaper, LLC,
Member Equity 16,000
WLKT Partners, Drawing 20,000
Madison Sanders, Drawing 59,000
Observer Newspaper, LLC,
Drawing 16,000
* $55,000 + $4,000

12-12
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-8 (Concluded)

c. MARVEL MEDIA, LLC
Statement of Members’ Equity
For the Year Ended December 31, 20Y2
Observer
WLKT Madison Newspaper, Total LLC
Partners Sanders LLC Capital
Balances,
January 1, 20Y2 $200,000 $ 40,000 $160,000 $400,000
Capital additions 50,000 50,000
Net income for the year 126,000 138,500 95,500 360,000
Member withdrawals (20,000) (59,000) (16,000) (95,000)
Balances,
December 31, 20Y2 $356,000 $119,500 $239,500 $715,000

d. An income-sharing agreement provides flexibility and fairness. Without an

income-sharing agreement, each member would be credited with an equal
proportion of the total earnings, or one-third each. However, the members provide
different capital and effort to the LLC. WLKT is a large contributor of capital
(funds), while Madison Sanders is providing ongoing effort and expertise. These
separate contributions should be acknowledged in the income-sharing formula.
Thus, the agreement credits member equity for both interest on capital and a
salary allowance for Sanders. Any remaining income is credited to capital
according to a negotiated allocation, which in this case is not an equal amount
to each member.

12-13
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-9
a. and b.
Myles Etter, Capital 70,000
Lonnie Davis, Capital 70,000
$210,000 × 1/3.
Note: The sale to Davis is not a transaction of the partnership, so the sales price is not
considered in this journal entry.

Ex. 12-10

a. (1) Trent Henry, Capital (1/5 × $160,000) 32,000

Tim Chou, Capital (1/4 × $100,000) 25,000
LeAnne Gilbert, Capital 57,000

(2) Cash 90,000

Becky Clarke, Capital 90,000

b. Trent Henry, Capital ($160,000 – $32,000)……………… $128,000

Tim Chou, Capital ($100,000 – $25,000)………………… 75,000
LeAnne Gilbert, Capital…………………………………… 57,000
Becky Clarke, Capital……………………………………… 90,000

The purchase price paid for each interest by Gilbert is not a partnershp transaction, but
a transaction between partners. Thus, those amounts are not shown in the partnership
accounts.

12-14
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-11
a. Cash 30,000
Brad Paulson, Capital 2,500
Drew Webster, Capital 2,500
Austin Neel, Capital 35,000

b. Brad Paulson, Capital ($45,000 – $2,500)…………………… $42,500

Drew Webster, Capital ($60,000 – $2,500)…………………… 57,500
Austin Neel, Capital……………………………………………… 35,000
c. Tangible assets should be adjusted to current market prices so that the new partner
does not share in any gains or losses from changes in market prices prior to being
admitted. For example, if the market price of land doubled prior to admitting a new
partner, the existing partners should realize the increase in the value of the land in
their capital accounts prior to the new partner’s admission. Otherwise, the new
partner would share in the increase in the market value of the land.

Ex. 12-12
a. Bonus received by Solano:
Cody Jenkins, capital…………………………………………… $ 78,000
Lacey Tanner, capital…………………………………………… 46,000
Solano’s contribution…………………………………………… 32,000
Total partners’ capital after admitting Solano……………… $156,000
Solano’s equity interest after admission…………………… × 30 %
Valeria Solano, capital…………………………………………… $ 46,800
Solano’s contribution…………………………………………… 32,000
Bonus paid to Solano…………………………………………… $ 14,800

b. Cash 32,000
Cody Jenkins, Capital 7,400
Lacey Tanner, Capital 7,400
Valeria Solano, Capital 46,800

c. Apparently, Jenkins and Tanner value the expertise offered by Solano. Solano is
able to use the computer to design and render landscape designs. This type of
skill is likely to be very useful for both selling and implementing landscape ideas.
Her skills can help the partnership sell ideas to clients by providing computer
renderings of the designs. In this way, a client can see the design on the computer
before agreeing to the work. In addition, the computer-aided landscapes provide
materials plans, labor estimates, and other cost estimates for a particular design.
Thus, the partners may be better able to control their costs by using Solano’s skills.
Overall, they value her skills sufficiently to provide a partner bonus upon her
admittance to the partnership.

12-15
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-13
a. Medical Equipment 40,000
Abrams, Member Equity* 16,000
Lipscomb, Member Equity** 24,000
* $40,000 × 2/5 = $16,000
** $40,000 × 3/5 = $24,000

b. (1) Cash 228,000

Abrams, Member Equity* 15,600
Lipscomb, Member Equity** 23,400
Lin, Member Equity 189,000
* $39,000 × 2/5 = $15,600
** $39,000 × 3/5 = $23,400

Supporting calculations for the bonus:

Abrams, member equity ($154,000 + $16,000)……… $170,000
Lipscomb, member equity ($208,000 + $24,000)…… 232,000
Contribution by Lin……………………………………… 228,000
Total equity after admitting Lin……………………… $630,000
Lin’s equity interest after admission………………… × 30 %
Lin, member equity……………………………………… $189,000
Contribution by Lin……………………………………… $228,000
Lin’s equity interest after admission………………… 189,000
Bonus paid to Abrams and Lipscomb……………… $ 39,000

(2) Cash 124,000

Abrams, Member Equity* 3,000
Lipscomb, Member Equity** 4,500
Lin, Member Equity 131,500
* $7,500 × 2/5 = $3,000
** $7,500 × 3/5 = $4,500

Supporting calculations for the bonus:

Abrams, member equity………………………………… $170,000
Lipscomb, member equity……………………………… 232,000
Contribution by Lin……………………………………… 124,000
Total equity after admitting Lin……………………… $526,000
Lin’s equity interest after admission………………… × 25 %
Lin, member equity……………………………………… $131,500
Contribution by Lin……………………………………… 124,000
Bonus paid to Lin……………………………………… $ 7,500

12-16
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-14
a. L. Bowers, Capital 4,000
V. Lipscomb, Capital 4,000
Equipment 8,000

b. (1) Cash 20,000

L. Bowers, Capital* 4,800
V. Lipscomb, Capital 4,800
M. Ortiz, Capital 29,600
* $9,600 × 1/2

Supporting calculations for the bonus:

L. Bowers, capital ($96,000 – $4,000)…………………… $ 92,000
V. Lipscomb, capital ($40,000 – $4,000)……………… 36,000
Contribution by Ortiz……………………………………… 20,000
Total equity after admitting Ortiz……………………… $148,000
Ortiz’s equity interest after admission………………… × 20 %
M. Ortiz, capital…………………………………………… $ 29,600
Contribution by Ortiz……………………………………… 20,000
Bonus paid to Ortiz………………………………………… $ 9,600

(2) Cash 60,000

L. Bowers, Capital* 1,800
V. Lipscomb, Capital 1,800
M. Ortiz, Capital 56,400
* $3,600 × 1/2

Supporting calculations for the bonus:

L. Bowers, capital………………………………………… $ 92,000
V. Lipscomb, capital……………………………………… 36,000
Contribution by Ortiz……………………………………… 60,000
Total equity after admitting Otiz………………………… $188,000
Ortiz’s equity interest after admission………………… × 30 %
M. Ortiz, capital…………………………………………… $ 56,400
Contribution by Ortiz……………………………………… $ 60,000
M. Ortiz, capital…………………………………………… 56,400
Bonus paid to Bowers and Lipscomb………………… $ 3,600

The bonus to Bowers and Lipscomb is credited equally between Bowers’ and
Lipscomb’s capital accounts.

12-17
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-15
ANGEL INVESTOR ASSOCIATES
Statement of Partnership Equity
For the Year Ended December 31, 20Y5
Dennis Ben Randy Total
Overton, Testerman, Campbell, Partnership
Capital Capital Capital Capital
Balances,
January 1, 20Y5 $180,000 $120,000 $300,000
Admission of Randy Campbell — — $ 75,000 75,000
Salary allowance 40,000 40,000
Remaining income 52,800 35,200 22,000 110,000
Partner withdrawals (46,400)1 (17,600) 2 (11,000)3 (75,000)
Balances,
December 31, 20Y5 $226,400 $137,600 $ 86,000 $450,000

1
($52,800 + $40,000) ÷ 2
2 $35,200 ÷ 2
3 $22,000 ÷ 2

:
Admission of Randy Campbell
Equity of initial partners prior to admission……………………… $300,000
Contribution by Campbell…………………………………………… 75,000
Total……………………………………………………………………… $375,000
Campbell’s equity interest after admission……………………… × 20%
Campbell’s equity after admission………………………………… $ 75,000
Contribution by Campbell…………………………………………… 75,000
Bonus…………………………………………………………………… $ 0

Net income distribution:

The income-sharing ratio is equal to the proportion of the capital balances after
admitting Campbell according to the partnership agreement:
$180,000
Dennis Overton: = 48%
$375,000
$120,000
Ben Testerman: = 32%
$375,000
$75,000
Randy Campbell: = 20%
$375,000

These ratios can be multiplied by the $110,000 remaining income after the salary
allowance to Overton ($150,000 – $40,000). These amounts are credited to the
respective partner capital accounts. For example, Dennis Overton:
$52,800 = $110,000 × 48%.

12-18
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-15 (Concluded)

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

Ex. 12-16
a. Merchandise Inventory 22,300
Allowance for Doubtful Accounts 1,300
Lane Stevens, Capital* 9,000
Cherrie Ford, Capital** 6,000
LaMarcus Rollins, Capital** 6,000
* ($22,300 – $1,300) × 3/7
** ($22,300 – $1,300) × 2/7

b. Lane Stevens, Capital* 159,000

Cash 59,000
Notes Payable 100,000
* $150,000 + $9,000

Ex. 12-17
a. The income-sharing ratio is determined by dividing the net income for each member
by the total net income. Thus, in 20Y3, the income-sharing ratio is as follows:

$57,000
Idaho Properties, LLC: = 30%
$190,000

$133,000
Silver Streams, LLC: = 70%
$190,000

Or a 3:7 ratio

12-19
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-17 (Concluded)

b. Following the same procedure as in a.:

$62,500
Idaho Properties, LLC: = 25%
$250,000

$137,500
Silver Streams, LLC: = 55%
$250,000

$50,000
Thomas Dunn: = 20%
$250,000

c. Thomas Dunn provided a $230,000 cash contribution to the business. The amount
credited to his member equity account is this amount less a $10,000 bonus paid to
the other two members, or $220,000.

d. The positive entries to Idaho Properties and Silver Streams are the result of a bonus
paid by Thomas Dunn.

e. Thomas Dunn acquired a 22% interest in the business on January 1, 20Y4, computed
as follows:

Thomas Dunn, member equity………………………… $ 220,000

Idaho Properties, LLC, member equity……………… 333,000
Silver Streams, LLC, member equity………………… 447,000
Total………………………………………………………… $1,000,000

Thomas’s ownership interest after admission

($220,000 ÷ $1,000,000)………………………………… 22%

f. Withdrawals need not be the same as the income credited to the members’ equity
accounts. Withdrawals will be less than the amounts credited when the members
want to retain capital in the business to support business growth or otherwise
strengthen the business.

12-20
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-18
a. Cash balance………………………………………………… $35,000
Sum of capital accounts…………………………………… 46,000
Loss on realization………………………………………… $11,000

Hewitt Patel
Capital balances before realization……………………… $28,000 $18,000
b. Division of loss on realization*…………………………… (5,500) (5,500)
Balances……………………………………………………… $22,500 $23,500
c. Cash distributed to partners……………………………… 22,500 23,500
Final balances……………………………………………… $ 0 $ 0
* ($11,000) ÷ 2

Ex. 12-19
Oliver Ansari Total
Capital balances before realization………… $28,000 $35,000 $63,000
Division of gain on realization
[($67,000 – $63,000) ÷ 2]…………………… 2,000 2,000
Capital balances after realization…………… $30,000 $37,000
Cash distributed to partners………………… 30,000 37,000
Final balances…………………………………… $ 0 $ 0

Ex. 12-20
a. Deficiency
b. $97,500 ($73,500 + $41,000 – $17,000)
c. Cash 17,000
Fowler, Capital 17,000

Support for entry: Lewis Zapata Fowler

Capital balances after realization………… $73,500 $41,000 $(17,000) Dr.
Receipt of partner deficiency…………… 17,000
Capital balances after eliminating
deficiency…………………………………… $73,500 $41,000 $ 0

12-21
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-21
a. $975 [$1,500 – ($225 + $300)]
b. Cash should be distributed as indicated in the following tabulation:
Bray Lincoln Mapes Total
Capital invested…………… $225 $300 $ — $ 525
Net income…………………… +325 +325 +325 + 975 *
Capital balances and
cash distribution………… $550 $625 $325 $1,500
* $1,500 – $225 – $300
c. Mapes has a capital deficiency of $75, as indicated in the following
tabulation:
Bray Lincoln Mapes Total
Capital invested…………… $225 $300 $ — $525
Net loss……………………… – 75 – 75 –75 –225 *
Capital balances…………… $150 $225 $(75) Dr. $300
* $300 – $525

Ex. 12-22
Nettles King Tanaka
Capital balances after realization…………… $(15,000) $ 46,000 $71,000
Distribution of partner deficiency…………… 15,000 (10,000)* (5,000) *
Capital balances after deficiency
distribution…………………………………… $ 0 $ 36,000 $66,000
* $15,000 × 2/3
** $15,000 × 1/3

12-22
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-23
GOLD, PORTER, AND SIMS
Statement of Partnership Liquidation
For the Period Ending July 1–29
Noncash Gold Porter Sims
Cash + Assets = Liabilities + (3/6) + (2/6) + (1/6)
Balances before realization $ 56,000 $96,000 $32,000 $55,000 $45,000 $20,000
Sale of assets and division of loss +90,000 –96,000 — –3,000 –2,000 –1,000
Balances after realization $146,000 $ 0 $32,000 $52,000 $43,000 $19,000
Payment of liabilities –32,000 — –32,000 — — —
Balances after payment of liabilities $114,000 $ 0 $ 0 $52,000 $43,000 $19,000
Cash distributed to partners –114,000 — — –52,000 –43,000 –19,000
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

12-23
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-24
a. ARCADIA SALES, LLC
Statement of LLC Liquidation
For the Period August 1–31
Member Equity
Noncash Lester Torres Hearst
Cash + Assets = Liabilities + (2/5) + (2/5) + (1/5)
Balances before realization $ 26,000 $146,000 $35,000 $49,000 $61,000 $27,000
Sale of assets and division of gain +158,000 –146,000 — +4,800 +4,800 +2,400
Balances after realization $184,000 $ 0 $35,000 $53,800 $65,800 $29,400
Payment of liabilities –35,000 — –35,000 — — —
Balances after payment of liabilities $149,000 $ 0 $ 0 $53,800 $65,800 $29,400
Cash distributed to members –149,000 — — –53,800 –65,800 –29,400
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

b. Lester, Member Equity 53,800

Torres, Member Equity 65,800
Hearst, Member Equity 29,400
Cash 149,000

c. The income- and loss-sharing ratio is only used to distribute the gain or loss on the realization of asset sales.
It is not used for the final distribution. The final distribution is based upon the credit balances in the member
equity accounts after all gains and losses on realization have been divided and any partner deficiencies have
been paid or allocated.

12-24
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-25
a. (1) Revenues 483,000
Expenses 421,000
Angel Alvarez, Capital 31,000
Emma Allison, Capital 31,000

(2) Angel Alvarez, Capital 32,000

Emma Allison, Capital 39,000
Angel Alvarez, Drawing 32,000
Emma Allison, Drawing 39,000

b.
ALVAREZ AND ALLISON
Statement of Partnership Equity
For the Year Ended December 31, 20Y4
Angel Emma
Alvarez Allison Total
Balances, January 1, 20Y4 $ 47,000 $ 73,000 $120,000
Additional investment during the year 8,000 — 8,000
Net income for the year 31,000 31,000 62,000
Withdrawals during the year (32,000) (39,000) (71,000)
Balances, December 31, 20Y4 $ 54,000 $ 65,000 $119,000

12-25
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Ex. 12-26
$16,100,000,000
a. Revenue per professional staff, current year: = $274,814
58,585

$14,900,000,000
Revenue per professional staff, previous year: = $278,027
53,592

b. The revenues increased between the two years from $14.9 billion to $16.1 billion, or
8.1% [($16.1 – $14.9) ÷ $14.9]. Revenues have increased sharply during this period.
The number of employees has grown even more so, from 53,592 to 58,585, or 9.3%
[(58,585 – 53,592) ÷ 53,592]. As a result, the revenue per professional staff employee
has declined by approximately $3,200, from $278,027 to $274,814. There is a slight
decline in efficiency during this time. It is possible Deloitte & Touche is staffing in
anticpation of revenue growth, as it seems the firm is growing strongly.

Ex. 12-27
$16,200,000
a. Revenue per employee, 20Y9: = $108,000
150

$18,400,000
Revenue per employee, 20Y8: = $92,000
200

b. Revenues decreased between the two years; however, the number of employees
has decreased at a faster rate. Thus, the revenue per employee increased from
$92,000 in 20Y8 to $108,000 in 20Y9. This indicates that the efficiency of the firm has
increased in the two years even though revenues declined. This is likely the result of
the termination of the two contracts. That is, the large decrease in the employment
base is the likely result of the reduction in business. Thus, the business was able to
reduce the workforce faster than the revenue base. This suggests that the contracts
were not very efficient from a revenue per employee perspective and thus were
likely good candidates for termination.

12-26
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

PROBLEMS
Prob. 12-1A
1. Mar. 1 Cash 23,400
Merchandise Inventory 62,600
Eric Keene, Capital 86,000

1 Cash 39,000
Accounts Receivable 19,500
Equipment 55,400
Allowance for Doubtful Accounts 1,400
Accounts Payable 15,000
Notes Payable 37,500
Renee Wallace, Capital 60,000

2. KEENE AND WALLACE

Balance Sheet
March 1, 20Y8
Assets
Current assets:
Cash $62,400**
Accounts receivable $19,500
Less allowance for doubtful accounts 1,400 18,100
Merchandise inventory 62,600
Total current assets $143,100
Property, plant, and equipment:
Equipment 55,400
Total assets $198,500
Liabilities
Current liabilities:
Accounts payable $15,000
Notes payable 37,500
Total liabilities $ 52,500
Partners’ Equity
Eric Keene, capital $86,000
Renee Wallace, capital 60,000
Total partners’ equity 146,000
Total liabilities and partners’ equity $198,500

** $23,400 + $39,000

12-27
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-1A (Concluded)

3. Feb. 28 Revenues 300,000
Expenses 230,000
Eric Keene, Capital* 33,800
Renee Wallace, Capital* 36,200

28 Eric Keene, Capital 19,000

Renee Wallace, Capital 24,000
Eric Keene, Drawing 19,000
Renee Wallace, Drawing 24,000

* Computations:
Keene Wallace Total
1
Interest allowance…………………………… $ 8,600 $ 6,000 2 $14,600
Salary allowance……………………………… 19,000 24,000 43,000
Remaining income (1:1)……………………… 6,200 3 6,200 3 12,400
Net income……………………………………… $33,800 $36,200 $70,000
1
10% × $86,000
2
10% × $60,000
3 ($70,000 – $14,600 – $43,000) × 1/2

12-28
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-2A
(1) (2)
$115,000 $200,000
Plan Morrison Greene Morrison Greene
a. ……………………………………… $57,500 $57,500 $100,000 $100,000
b. ……………………………………… 86,250 28,750 150,000 50,000
c. ……………………………………… 38,333 76,667 66,667 133,333
d. ……………………………………… 60,500 54,500 103,000 97,000
e. ……………………………………… 45,500 69,500 88,000 112,000
f. ……………………………………… 45,000 70,000 79,000 121,000

Details:
$115,000 $200,000
Morrison Greene Morrison Greene
a. Net income (1:1)………………… $57,500 $57,500 $100,000 $100,000
b. Net income (3:1)………………… $86,250 $28,750 $150,000 $ 50,000
c. Net income (1:2)………………… $38,333 $76,667 $ 66,667 $133,333
1
d. Interest allowance……………… $ 9,000 $ 3,000 $ 9,000 $ 3,000
Remaining income (1:1)………… 51,500 51,500 94,000 94,000
Net income……………………… $60,500 $54,500 $103,000 $ 97,000
e. Interest allowance……………… $ 9,000 $ 3,000 $ 9,000 $ 3,000
Salary allowance………………… 40,000 70,000 40,000 70,000
Excess of allowances over
2
income (1:1)…………………… (3,500) (3,500)
Remaining income (1:1)………… 39,000 39,000
Net income……………………… $45,500 $69,500 $ 88,000 $112,000
f. Interest allowance……………… $ 9,000 $ 3,000 $ 9,000 $ 3,000
Salary allowance………………… 40,000 70,000 40,000 70,000
4
Bonus allowance………………… 1,0003 18,000
Excess of allowances over
income (1:1)…………………… (4,000) (4,000)
Remaining income (1:1)………… 30,000 30,000
Net income……………………… $45,000 $70,000 $ 79,000 $121,000
1
$150,000 × 6%
2
($115,000 – $12,000 – $110,000)/2
3
20% × [$115,000 – ($40,000 + $70,000)]
4
20% × [$200,000 – ($40,000 + $70,000)]

12-29
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-3A
1. LAMBERT AND YOST
Income Statement
For the Year Ended December 31, 20Y3
Professional fees $395,300
Operating expenses:
Salary expense $154,500
Depreciation expense—building 15,700
Property tax expense 12,000
Heating and lighting expense 8,500
Supplies expense 6,000
Depreciation expense—office equipment 5,000
Miscellaneous expense 3,600
Total operating expenses 205,300
Net income $190,000

Division of net income:

Tyler Jayla
Lambert Yost Total
Salary allowance……………………………… $45,000 $54,700 $ 99,700
Interest allowance……………………………… 13,500 * 7,800 ** 21,300
Remaining income (1:1)……………………… 34,500 34,500 69,000
Net income……………………………………… $93,000 $97,000 $190,000

* $135,000 × 10%
** ($88,000 – $10,000) × 10%

2. LAMBERT AND YOST

Statement of Partnership Equity
For the Year Ended December 31, 20Y3
Tyler Jayla
Lambert Yost Total
Balances, January 1, 20Y3 $135,000 $ 78,000 $ 213,000
Capital additions — 10,000 10,000
Net income for the year 93,000 97,000 190,000
Partner withdrawals (50,000) (60,000) (110,000)
Balances, December 31, 20Y3 $178,000 $125,000 $ 303,000

12-30
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-3A (Concluded)

3. LAMBERT AND YOST
Balance Sheet
December 31, 20Y3
Assets
Current assets:
Cash $ 34,000
Accounts receivable 47,800
Supplies 2,000
Total current assets $ 83,800
Property, plant, and equipment:
Land $120,000
Building $157,500
Less accumulated depreciation 67,200 90,300
Office equipment $ 63,600
Less accumulated depreciation 21,700 41,900
Total property, plant, and equip. 252,200
Total assets $336,000
Liabilities
Current liabilities:
Accounts payable $ 27,900
Salaries payable 5,100
Total liabilities $ 33,000
Partners’ Equity
Tyler Lambert, capital $178,000
Jayla Yost, capital 125,000
Total partners’ equity 303,000
Total liabilities and partners’ equity $336,000

12-31
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-4A
1. June 30 Asset Revaluations 2,900
Accounts Receivable 2,500
Allowance for Doubtful Accounts 400
[($42,500 – $2,500) × 5%] – $1,600.

30 Merchandise Inventory 4,600

Asset Revaluations 4,600
$76,600 – $72,000.

30 Accumulated Depreciation—Equipment 43,100

Equipment 24,800
Asset Revaluations 18,300
$155,700 – $180,500.

30 Asset Revaluations 20,000*

Musa Moshref, Capital 10,000
Shaniqua Hollins, Capital 10,000

2. July 1 Shaniqua Hollins, Capital 70,000

Taylor Anderson, Capital 70,000

1 Cash 45,000
Taylor Anderson, Capital 45,000

* –$2,900 + $4,600 + $18,300

12-32
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-4A (Concluded)

3. MOSHREF, HOLLINS, AND ANDERSON
Balance Sheet
July 1, 20Y7
Assets
Current assets:
Cash1 $ 53,000
Accounts receivable $40,000
Less allowance for doubtful accounts 2,000 38,000
Merchandise inventory 76,600
Prepaid insurance 3,000
Total current assets $170,600
Property, plant, and equipment:
Equipment 155,700
Total assets $326,300
Liabilities
Current liabilities:
Accounts payable $ 21,300
Notes payable 35,000
Total liabilities $ 56,300
Partners’ Equity
Musa Moshref, capital2 $130,000
Shaniqua Hollins, capital3 25,000
Taylor Anderson, capital 115,000
Total partners’ equity 270,000
Total liabilities and partners’ equity $326,300

1 $8,000 + $45,000
2
$120,000 + $10,000
3 $85,000 + $10,000 – $70,000

12-33
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-5A
1. GERLOFF, CHU, AND JEWETT
Statement of Partnership Liquidation
For Period February 3–28
Capital
Noncash Gerloff Chu Jewett
Cash + Assets = Liabilities + (2/4) + (1/4) + (1/4)
Balances before realization $ 5,200 $55,900 $15,000 $19,300 $4,500 $22,300
a. Sale of assets and division of loss +34,300 –55,900 — –10,800 –5,400 –5,400
Balances after realization $39,500 $ 0 $15,000 $ 8,500 $ (900) $16,900
b. Payment of liabilities –15,000 — –15,000 — — —
Balances after payment of liabilities $24,500 $ 0 $ 0 $ 8,500 $ (900) $16,900
c. Receipt of deficiency +900 — — — +900 —
Balances $25,400 $ 0 $ 0 $ 8,500 $ 0 $16,900
d. Cash distributed to partners –25,400 — — –8,500 — –16,900
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

2 a. William Gerloff, Capital 600

Courtney Jewett, Capital 300
Joshua Chu, Capital 900

The $900 deficiency of Chu would be divided between the other partners, Gerloff and Jewett, in their income-sharing ratio
(2:1, respectively). Therefore, Gerloff would absorb two-thirds of the $900 deficiency, or $600, and Jewett would absorb
one-third of the $900 deficiency, or $300.

b. William Gerloff, Capital* 7,900

Courtney Jewett, Capital** 16,600
Cash 24,500
* $8,500 – $600
** $16,900 – $300

12-34
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-6A
1. a. SAILS, WELCH, AND GREENBERG
Statement of Partnership Liquidation
For Period November 1–30
Capital
Noncash Sails Welch Greenberg
Cash + Assets = Liabilities + (2/5) + (2/5) + (1/5)
Balances before realization $ 32,000 $128,000 $20,000 $58,000 $72,000 $10,000
Sale of assets and division of gain +156,000 –128,000 — +11,200 +11,200 +5,600
Balances after realization $188,000 $ 0 $20,000 $69,200 $83,200 $15,600
Payment of liabilities –20,000 — –20,000 — — —
Balances after payment of liabilities $168,000 $ 0 $ 0 $69,200 $83,200 $15,600
Cash distributed to partners –168,000 — — –69,200 –83,200 –15,600
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

12-35
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-6A (Concluded)

1. b. SAILS, WELCH, AND GREENBERG
Statement of Partnership Liquidation
For Period November 1–30
Capital
Noncash Sails Welch Greenberg
Cash + Assets = Liabilities + (2/5) + (2/5) + (1/5)
Balances before realization $32,000 $128,000 $20,000 $58,000 $72,000 $10,000
Sale of assets and division of loss +55,000 –128,000 — –29,200 –29,200 –14,600
Balances after realization $87,000 $ 0 $20,000 $28,800 $42,800 $ (4,600)
Payment of liabilities –20,000 — –20,000 — — —
Balances after payment of liabilities $67,000 $ 0 $ 0 $28,800 $42,800 $ (4,600)
Receipt of deficiency +4,600 — — — — +4,600
Balances $71,600 $ 0 $ 0 $28,800 $42,800 $ 0
Cash distributed to partners –71,600 — — –28,800 –42,800 —
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

2. a. Sails, Capital 2,300

Welch, Capital 2,300
Greenberg, Capital 4,600

The $4,600 deficiency of Greenberg would be divided between the other partners, Sails and Welch, in their income-
sharing ratio (1:1, respectively). Therefore, Sails would absorb one-half of the $4,600 deficiency, or $2,300, and Welch
would absorb one-half of the $4,600 deficiency, or $2,300.

b. Sails, Capital* 26,500

Welch, Capital** 40,500
Cash 67,000
* $28,800 – $2,300
** $42,800 – $2,300

12-36
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Prob. 12-1B
1. Apr. 1 Cash 18,000
Merchandise Inventory 50,000
Whitney Lang, Capital 68,000

1 Cash 26,200
Accounts Receivable 43,400
Merchandise Inventory 28,900
Equipment 63,400
Allowance for Doubtful Accounts 3,500
Accounts Payable 23,400
Notes Payable 15,000
Eli Capri, Capital 120,000

2. LANG AND CAPRI

Balance Sheet
April 1, 20Y1
Assets
Current assets:
Cash $ 44,200*
Accounts receivable $43,400
Less allowance for doubtful accounts 3,500 39,900
Merchandise inventory 78,900**
Total current assets $163,000
Property, plant, and equipment:
Equipment 63,400
Total assets $226,400
Liabilities
Current liabilities:
Accounts payable $ 23,400
Notes payable 15,000
Total liabilities $ 38,400
Partners’ Equity
Whitney Lang, capital $ 68,000
Eli Capri, capital 120,000
Total partners’ equity 188,000
Total liabilities and partners’ equity $226,400

* $18,000 + $26,200
** $28,900 + $50,000

12-37
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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-1B (Concluded)

3. Mar. 31 Revenues 598,000
Expenses 480,000
Whitney Lang, Capital* 63,400
Eli Capri, Capital* 54,600

31 Whitney Lang, Capital 40,000

Eli Capri, Capital 30,000
Whitney Lang, Drawing 40,000
Eli Capri, Drawing 30,000

* Computations:
Lang Capri Total
Interest allowance…………………………… $ 6,8001 $12,000 2 $ 18,800
Salary allowance……………………………… 36,000 22,000 58,000
Remaining income (1:1)…………………… 20,600 3 20,600 3 41,200
Net income…………………………………… $63,400 $54,600 $118,000
1
10% × $68,000
2
10% × $120,000
3
($118,000 – $18,800 – $58,000) × 1/2

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-2B
(1) (2)
$420,000 $150,000
Plan Howell Nickles Howell Nickles
a. …………………………………… $210,000 $210,000 $ 75,000 $75,000
b. …………………………………… 168,000 252,000 60,000 90,000
c. …………………………………… 280,000 140,000 100,000 50,000
d. …………………………………… 249,500 170,500 87,500 62,500
e. …………………………………… 218,250 201,750 83,250 66,750
f. …………………………………… 254,550 165,450 92,550 57,450

Details:
$420,000 $150,000
Howell Nickles Howell Nickles
a. Net income (1:1)……………… $210,000 $210,000 $ 75,000 $75,000
b. Net income (2:3)……………… $168,000 $252,000 $ 60,000 $90,000
c. Net income (2:1)……………… $280,000 $140,000 $100,000 $50,000
d. Interest allowance…………… $ 5,0001 $ 7,500 $ 5,000 $ 7,500
Remaining income (3:2)……… 244,500 163,000 82,500 55,000
Net income……………………… $249,500 $170,500 $ 87,500 $62,500
e. Interest allowance…………… $ 5,000 $ 7,500 $ 5,000 $ 7,500
Salary allowance……………… 38,000 19,000 38,000 19,000
Remaining income (1:1)……… 175,250 175,250 40,250 40,250
Net income……………………… $218,250 $201,750 $ 83,250 $66,750
f. Interest allowance…………… $ 5,000 $ 7,500 $ 5,000 $ 7,500
Salary allowance……………… 38,000 19,000 38,000 19,000
Bonus allowance……………… 72,600 2 18,600 3
Remaining income (1:1)……… 138,950 138,950 30,950 30,950
Net income……………………… $254,550 $165,450 $ 92,550 $57,450
1
$50,000 × 10%
2
20% × [$420,000 – ($38,000 + $19,000)]
3
20% × [$150,000 – ($38,000 + $19,000)]

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-3B
1. RAMIREZ AND XUE
Income Statement
For the Year Ended December 31, 20Y2
Professional fees $555,300
Operating expenses:
Salary expense $384,900
Depreciation expense—building 12,900
Heating and lighting expense 10,500
Depreciation expense—office equipment 6,300
Property tax expense 3,200
Supplies expense 3,000
Miscellaneous expense 2,500
Total operating expenses 423,300
Net income $132,000

Division of net income:

Camila Ping
Ramirez Xue Total
Salary allowance…………………………… $50,000 $65,000 $115,000
Interest allowance………………………… 15,000 * 16,200 ** 31,200
Remaining income (loss) (1:1)…………… (7,100) (7,100) (14,200)
Net income…………………………………… $57,900 $74,100 $132,000
* $125,000 × 12%
** ($155,000 – $20,000) × 12%
2. RAMIREZ AND XUE
Statement of Partnership Equity
For the Year Ended December 31, 20Y2
Camila Ping
Ramirez Xue Total
Balances, January 1, 20Y2 $125,000 $135,000 $260,000
Capital additions — 20,000 20,000
Net income for the year 57,900 74,100 132,000
Partner withdrawals (35,000) (50,000) (85,000)
Balances, December 31, 20Y2 $147,900 $179,100 $327,000

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-3B (Concluded)

3. RAMIREZ AND XUE
Balance Sheet
December 31, 20Y2
Assets
Current assets:
Cash $ 70,300
Accounts receivable 33,600
Supplies 5,800
Total current assets $109,700
Property, plant, and equipment:
Land $128,000
Building $175,000
Less accumulated depreciation 80,000 95,000
Office equipment $ 42,000
Less accumulated depreciation 25,300 16,700
Total property, plant, and equip. 239,700
Total assets $349,400
Liabilities
Current liabilities:
Accounts payable $ 12,400
Salaries payable 10,000
Total liabilities $ 22,400
Partners’ Equity
Camila Ramirez, capital $147,900
Ping Xue, capital 179,100
Total partners’ equity 327,000
Total liabilities and partners’ equity $349,400

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-4B
1. Aug. 31 Asset Revaluations 1,800
Accounts Receivable 1,500
Allowance for Doubtful Accounts 300
[($19,500 – $1,500) × 5%] – $600.

31 Merchandise Inventory 4,300

Asset Revaluations 4,300
$46,800 – $42,500.

31 Accumulated Depreciation—Equipment 15,500

Equipment 3,000
Asset Revaluations 12,500
$64,500 – $67,500.

31 Asset Revaluations 15,000*

Brian Caldwell, Capital 7,500
Adriana Estrada, Capital 7,500

2. Sept. 1 Adriana Estrada, Capital 26,000

Kris Mays, Capital 26,000

1 Cash 32,000
Kris Mays, Capital 32,000
* –$1,800 + $4,300 + $12,500

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-4B (Concluded)

3. CALDWELL, ESTRADA, AND MAYS
Balance Sheet
September 1, 20Y9
Assets
Current assets:
Cash1 $44,300
Accounts receivable $18,000
Less allowance for doubtful accounts 900 17,100
Merchandise inventory 46,800
Prepaid insurance 1,200
Total current assets $109,400
Property, plant, and equipment:
Equipment 64,500
Total assets $173,900
Liabilities
Current liabilities:
Accounts payable $ 8,900
Notes payable 15,000
Total liabilities $ 23,900
Partners’ Equity
Brian Caldwell, capital2 $62,500
Adriana Estrada, capital3 29,500
4 58,000
Kris Mays, capital
Total partners’ equity 150,000
Total liabilities and partners’ equity $173,900

1 $12,300 + $32,000
2
$55,000 + $7,500
3 $48,000 + $7,500 – $26,000
4
$26,000 + $32,000

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-5B
1. FAIRCHILD, LOWES, AND HOWARD
Statement of Partnership Liquidation
For the Period April 10–30
Capital
Noncash Fairchild Lowes Howard
Cash + Assets = Liabilities + (1/4) + (1/4) + (2/4)
Balances before realization $23,500 $84,500 $22,000 $42,000 $ 7,500 $36,500
a. Sale of assets and division of loss +48,500 –84,500 — –9,000 –9,000 –18,000
Balances after realization $72,000 $ 0 $22,000 $33,000 $(1,500) $18,500
b. Payment of liabilities –22,000 — –22,000 — — —
Balances after payment of liabilities $50,000 $ 0 $ 0 $33,000 $(1,500) $18,500
c. Receipt of deficiency +1,500 — — — +1,500 —
Balances $51,500 $ 0 $ 0 $33,000 $ 0 $18,500
d. Cash distributed to partners –51,500 — — –33,000 — –18,500
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

2. a. Zach Fairchild, Capital 500

Amber Howard, Capital 1,000
Austin Lowes, Capital 1,500

The $1,500 deficiency of Lowes would be divided between the other partners, Fairchild and Howard, in their
income-sharing ratio (1:2 respectively). Therefore, Fairchild would absorb one-third of the $1,500 deficiency, or $500,
and Howard would absorb two-thirds of the $1,500 deficiency, or $1,000.

b. Zach Fairchild, Capital* 32,500

Amber Howard, Capital** 17,500
Cash 50,000
* $33,000 – $500
** $18,500 – $1,000

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-6B
1. a. CHAPELLE, ROCK, AND PRYOR
Statement of Partnership Liquidation
For Period August 3–29
Capital
Noncash Chapelle Rock Pryor
Cash + Assets = Liabilities + (1/5) + (2/5) + (2/5)
Balances before realization $ 65,000 $167,000 $30,000 $14,000 $102,000 $ 86,000
Sale of assets and division of gain +217,000 –167,000 — +10,000 +20,000 +20,000
Balances after realization $282,000 $ 0 $30,000 $24,000 $122,000 $106,000
Payment of liabilities –30,000 — –30,000 — — —
Balances after payment of liabilities $252,000 $ 0 $ 0 $24,000 $122,000 $106,000
Cash distributed to partners –252,000 — — –24,000 –122,000 –106,000
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

Prob. 12-6B (Concluded)

1. b. CHAPELLE, ROCK, AND PRYOR
Statement of Partnership Liquidation
For Period August 3–29
Capital
Noncash Chapelle Rock Pryor
Cash + Assets = Liabilities + (1/5) + (2/5) + (2/5)
Balances before realization $ 65,000 $167,000 $30,000 $14,000 $102,000 $86,000
Sale of assets and division of loss +72,000 –167,000 — –19,000 –38,000 –38,000
Balances after realization $137,000 $ 0 $30,000 $ (5,000) $ 64,000 $48,000
Payment of liabilities –30,000 — –30,000 — — —
Balances after payment of liabilities $107,000 $ 0 $ 0 $ (5,000) $ 64,000 $48,000
Receipt of deficiency +5,000 — — +5,000 — —
Balances $112,000 $ 0 $ 0 $ 0 $ 64,000 $48,000
Cash distributed to partners –112,000 — — — –64,000 –48,000
Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

2. a. Rock, Capital 2,500

Pryor, Capital 2,500
Chapelle, Capital 5,000

The $5,000 deficiency of Chapelle would be divided between the other partners, Rock and Pryor, in their income-
sharing ratio (1:1, respectively). Therefore, Rock would absorb one-half of the $5,000 deficiency, or $2,500, and Pryor
would absorb one-half of the $5,000 deficiency, or $2,500.
b. Rock, Capital* 61,500
Pryor, Capital** 45,500
Cash 107,000
* $64,000 – $2,500
** $48,000 – $2,500

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

CASES & PROJECTS

CP 12-1
This scenario highlights one of the problems that arises in partnerships:
attempting to align contribution with income division. Often, disagreements
are based on honest differences of opinion. However, in this scenario, there is
evidence that Robbins was acting unethically. Robbins apparently made no
mention of his plans to “scale back” once the partnership was consummated.
As a result, Barrow agreed to an equal division of income based on the
assumption that Robbins’s past efforts would project into the future, while in
fact, Robbins had no intention of this. As a result, Barrow is now providing
more effort while receiving the same income as Robbins. This is clearly not
sustainable in the long term. Robbins does not appear to be concerned about
this inequity. Thus, the evidence points to some duplicity on Robbins’s part.
Essentially, he knows that he is riding on Barrow’s effort and had planned it
that way.

Barrow 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
contributions to the firm.

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

CP 12-2
a. and b.
This table is from the 2015 "Accounting Today Top 100 Firms."
Total Revenues Total Revenues
(in millions) Partners *per Partner
Deloitte & Touche………………… $14,908 3,030 $4,920,132
PwC…………………………………… 11,724 2,691 4,356,745
Ernst & Young……………………… 9,900 2,700 3,666,667
KPMG………………………………… 6,870 1,813 3,789,300
* 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. For example, revenue per partner is determined for Deloitte &
Touche as follows:
Deloitte & Touche revenue $14,908
× 1,000,000 = $4,920,132
per partner: 3,030

c.
Percent of
Revenue per Deloitte &
Partner Touche
Deloitte & Touche…………………… $4,920,132 100%
PwC…………………………………… 4,356,745 89%*
KPMG…………………………………… 3,789,300 77%
Ernst & Young………………………… 3,666,667 75%
* $4,356,745 ÷ $4,920,132

d. As can be seen, Deloitte & Touche has the highest revenue per partner relative to
the other three firms, while Ernst & Young has the lowest. Ernst & Young’s revenue
per partner is 75% of Deloitte & Touche’s. These data suggest that Deloitte &
Touche has a somewhat smaller relative partner base supporting its revenues than
do the other three firms. This result may be from the advantage of relative size (in
revenues) compared to the other two firms.

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

CP 12-3
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, Lindsey Wilson, 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
the same as those operating the LLC. Specifically, you would want to advise
Wilson 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 Wilson. 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 Wilson’s return limited to the 10% preferred return. Wilson
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. Wilson should be counseled to consider all aspects of the LLC contribution
to determine whether 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 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.

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 CHAPTER 12 Accounting for Partnerships and Limited Liability Companies

CP 12-4
A good solution to this problem would be to divide income into three steps:
1. Provide interest on each partner’s 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 calculated
separately in the income division formula before applying the percentage
formula. Thus, Willard will receive a large interest distribution based on the
large capital balance, while Hill 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 between them.

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