Course ADVANCED ACCOUNTING

Lecture Notes
Title
Reference: John Larson, “Modern Advanced Accounting”

Lecturer:
Jimale Abdilahi

Hargeisa, Somaliland
 Chapter 1: Partnership: Organization and Operation
 Partnership is defined "an association of two or more persons to carry on, as co-
owners, a business for profit".
 Partnerships generally are associated with the practice of law, medicine, public
accounting and other professions, and also with small business enterprises.
 Partnership is divided in to; General partnership: Unlimited liability.
Limited liability partnerships (LLPs): Limited liability
 Basic Characteristics of the LLP: Ease of Formation, Limited Life, Mutual
Agency, Co-Ownership of Partnership Assets and Earnings.
 Characteristics of a corporation:
1. Separated legal entity from its owners: it can buy, sell and own properties.
2. Limited liability for stockholders. 3. Continuous existence.
4. Ease of transfer of ownership. 5. Ease of capital generation.
6. Centralized authority and responsibility-- to the President, not to numerous
owners. 7. Professional management. 8. Corporation taxes (double taxation).
9. Separation of ownership and management. 10. Government regulations.
 Legal status: a partnership is an "association of persons" and is not a separate
entity while a corporation is a separate entity from its owners.
 Economic substance: LLPs are as much accounting entities as are
corporations.
 The Partnership Contract: [Link] formation date and the planned duration of
the partnership; the names of the partners, and the name and business
activities of the partnership. 2. The assets to be invested by each partner, the
procedure for valuing noncash investments, and the penalties for a partner's
failure to invest and maintain the agreed amount of capital. 3. The authority, the
rights and the duties of each partner. 4. The accounting period to be used, the
nature of accounting records, financial statements and audits by independent
public accountants. 5. The net income (loss) sharing plans. 6. The drawings
allowed to each partner. 7. Insurance on the lives of partners. 8. Provision for
arbitration of disputes. 9. Provision for liquidation of the partnership at the
end of the term specified in the contract or at the death or retirement of a
partner.
 The following three types of accounts are used in LLPs for each partner:
Capital accounts, Drawing accounts, Accounts for loans to and from partners.
 The original investment from partner is recorded as:
Assets (based on current fair value)……$$$
Liabilities……………$$$
Capital-Partner A…..$$$
 Drawings from Partners are recorded as:
Drawing –Partner A………$$$
Cash……………………$$$
 Loans Receivable from Partners: this account is debited when a partner
receives cash from the LLP with the intention to repay this amount.
 Loans Payable to Partners: this account is credited when a partner makes a
cash payment to the LLP that is considered a loan rather than an investment.
 If a substantial unsecured loan has been made to a partner and repayment
appears doubtful, it is appropriate to offset the receivable against the partner's
capital account.
 The following are a few possible plans of income-sharing:
 Equally.
 In the ratio of partners' capital account balance on a specific date or in the
ratio of average capital account balance in the year.
 Allowing interest on partner's capital account balances and dividing the
remaining net income/loss in a specified ratio.
 Allowing salaries to partners and dividing the remaining net income/loss in
a specified ratio.
 Bonus to managing partner based on income.
 Allowing salaries to partners, allowing interest on capital account
balances, and dividing the remaining net income/loss in a specified ratio.

 The entire income/loss of LLP can also be shared by the ratio of partners'
capital account balances such as:
 by the original capital investments,
 by the capital account balance at the, beginning of each year,
 by the balances at the end of each year (before the distribution of net
income/loss), and
 By the average balances during the year.
Example 1: ledger accounts for partners
Alb and Bay established a LLP to be known as Alb & Bay LLP. Partner Alb invested $400,000
on January 1, 2013, and additional $100,000 on April 1. Partner Bay invested $800,000 on
January 1, 2013 and withdrew $50,000 on July 1. The partnership contract provides that each
partner may withdraw $5,000 cash on the last day of each month; both partners did so during
2013. The partnership earned net income of $300,000 for the year ended December 31,
2013, the first fiscal year of operations.

Required

a) Post to T account
b) Close the accounts
Example 2: Division of earnings in ratio of interest on partner’s Capital
Account Balances with Remaining Net Income or Loss Divided in specified
Ratio
Again refer to A&B LLP with a net income of $300,000 for 2013. Assume that the
partnership contract allows interest on partners’ average capital account balances at 15%
with any remaining net income or loss to be divided equally.
Required
a) Calculate the net income allocated to each partner
Alb Bay Combined
Interest on average capital account
balances:
Alb: $475,000X0.15 $71,250 $71,250
Bay: $775,000X0.15 $116,250 116,250
Subtotal $187,500
Remainder ($300,000-$187,500) 56,250 56,250 112,500
divided equally
Total $127,500 $172,500 $300,000

b) Calculate the net income or loss allocated to each partner by assuming that G&GLLP had
a net loss of $10,000 for the year ended December 31, 2013.

Alb Bay Combined

Interest on average capital
account balances:
Alb: $475,000X0.15 $71,250 $71,250
Bay: $775,000X0.15 $116,250 116,250
Subtotal $187,500
Resulting deficiency (98,750) (98,750) 197,500
($10,000+$187,500) divided
equally
Total $(27,500) $17,500 $(10,000)

c) Close the income summary in the loss situation.

Alb, Capital…………….27, 500

Income Summary ………………….10, 000
Bay, Capital…………….…………..17,500
 Example 3: Salary Allowance with Resultant Net Income or Loss
Divided In specified Ratio
By continuing illustration for A&B LLP, assume that the partnership contract provides for
an annual salary of $100,000 to Alb and $60,000 to Bay, with resultant net income or loss
to be divided equally. The salaries are paid monthly during the year.
Required
a) Calculate the net income allocated to each partner

The salaries are paid monthly during the year. The net income of $140,000 ($300,000-100,000-
60,000) is divided as follows:

Alb Bay Combined

Salaries $100,000 $60,000 $160,000
Net income ($300,000-$160,000) 70,000 70,000 140,000
divided equally
Totals $170,000 $130,000 $300,000

Example 4: Bonus to Managing Partner Based on Income

Assume that the net income is $300,000 and the contract provided for a bonus of 25%
of income after the bonus to Partner Alb. The remainder of net income is to be divided
equally.
Required
a) Calculate the net income allocated to each partner

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 Bonus of partner Alb = 0.25 x ($300,000-B) = B => 75,000 = 1.25 x B => B = $60,000

$300,000- $60,000 = $240,000/2 = $120,000

Partner Alb = $120,000 + $60,000 = $180,000

Partner Bay = $120,000

Example 5: salaries to partners with interest on capital accounts

Assume that the partnership contract for A&B LLP which earned net income of $300,000
provides for the following
1. Annual salaries of $100,000 to Alb and $60,000 to Bay.
2. Interest on average capital account balance (refer to example 5 above)
3. Remaining net income or loss divided equally
Requirement
a) Calculate amount allocated to each partner
Annual salary of Alb = $100,000, Annual salary of Bay = $60,000 Total = $160,000
$300,000 - $160,000 = $140,000
Alb Bay Combined
Interest on average
capital account
balances:
Alb: $475,000X0.15 $71,250 $71,250
Bay: $775,000X0.15 $116,250 116,250
Subtotal $187,500
Resulting deficiency (23,750) (23,750) (47,500)
($187,500-
$140,000) divided
equally
Total $47,500 $92,500 $140,000

Example 6: Investment in partnership by new partner

Assume that wolk and yary, partners of W&Y LLP share net income or loss equally and that
each has capital account balance of $60,000. Wolk and Yary agreed to admit Zell to the
partnership by investment of a land. Net income and losses of the new firm are to be shared
equally. The land has current fair value of $80,000.

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Requirement
Record the admission of the new partner into the partnership records

Land ………….80, 000

Zell, Capital…………..80,000

Example 7: Bonus to existing Partners

 Cain and Duke LLP, the two partners share net income and losses equally and have
capital account balances of $45,000 each. The partners agree to admit Eck to a one-
third interest in capital and one-third share in net income and losses for a cash
investment of $60,000. The net assets of the new partnership amount to $150,000
($45,000+$45,000+$60,000).

Requirement
a) Journalize the investment by the new partner and bonus credits to the existing partners

Cash………………..60,000

Cain, Capital ($10,000 X 1/2)…………..5,000

Duke, Capital ($10,000 X 1/2)………….5, 000
Eck, Capital ($150,000 X 1/3)………….50, 000

Example 8: Bonus to new partner

Farr and Gold LLP , who share net income and losses equally and have capital account
balances of $35,000 each., offer Hart one-third interest in net assets and one-third share
of net income and losses for and investment of $20,000 cash. The new partnership has
a net assets of $90,000 ($35,000+$35,000+$20,000).
Requirement
a) Calculate the bonus to the new partner.
1/3 *($35,000x2+20,000) = $30,000

b) Journalize the investment and bonus for the new partner.

Cash……………………………………..……20,000
Farr, Capital ($10,000 X 1/2)……………….5, 000
Gold, Capital ($10,000 X 1/2)……………….5, 000
Hart, Capital………………………....................................…30,000

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Example 9: Retirement of a partner: bonus to retiring partner
Assume that partner Lund is to retire from Jorb, Kent & Lund LLP. Each partner has a capital
balance of $60,000, and net income and losses are shared equally.
Requirement

a) Journalize the retirement by partner Lund.

Lund, Capital …………………………….60, 000

Jorb, Capital ($10,000 X 1/2)…………..5, 000
Kent, Capital ($10,000 X 1/2)…………..5, 000
Cash………………….……………………70,000

Example 10: Retirement of a partner: bonus to continuing partners

Merz, Noll and Park LLP share net income or losses equally and that each has a capital
account balance of $60,000. Noll retires from the partnership and receives $50,000.

Requirement

b) Journalize the retirement by partners Noll and bonus for the continuing partners.

Noll, Capital……………………60,000
Cash…………………………………………50,000
Merz, Capital ($10,000 X 1/2)…………….5, 000
Park, Capital ($10,000 X 1/2)……………..5, 000