FA3

1
FA3

• Cameron Morrill
• I. H. Asper School of Business
• University of Manitoba

2
The lecturer

• Cameron Morrill, Ph.D., C.G.A.
• Tel. [phone]
• Fax [phone]
• E-mail Cameron_Morrill_at_UManitoba.CA
• Office hours Tuesdays and Thursdays
• 1000 AM 1145 AM

3
Lesson 1. Partnership equity accounting

• Nature of a partnership
• Partnership contribution and profit distribution
• Financial statement preparation
• Admission of a new partner
• Retirement of a partner
• Liquidation of a partnership

4
1. Nature of a partnership

• Governed by provincial partnership acts
• Limited life
• Mutual agency
• Unlimited liability
• Not taxed as separate entities

5
2. Partnership contribution and profit
distribution

• Partners contribute cash or other assets (valued
  at fair market value at time of contribution) to
  the partnership
• Profit is distributed to partners in accordance
  with the partnership agreement (no agreement
  equal shares), which can include provisions for
  interest payments and salaries to partners, as
  well as a profit and loss ratio
• Hilton Problem 1

6
3. Financial statement preparation

• Include a balance sheet, income statement and
  cash flow statement
• UNIQUE TO PARTNERSHIPS
• Balance sheet Owners equity contains separate
  account for each partners capital (contribution
  plus retained earnings)
• Statement of partners capitals
• Hilton Interest and salaries paid to partners
  should not be included in income statement
• Hilton, Problem 4

7
4. Admission of a new partner

• New partner purchases all or part of the
  interest(s) of existing partner(s) no new assets
  to the partnership
• Transfer portion of existing book value to new
  partner (most common in practice)
• Asset revaluation based on price paid, and
  transfer revised book value
• Example Admission of new partner (revised
  version of 7b)

8
4. Admission of a new partner

• 2. New partner invests in the business by
  contributing cash or other assets (firm assets
  increase)
• New partner given proportionate interest in book
  value assets invested above BV bonused the
  existing partners (most common in practice)
• Asset revaluation based on new investment, with
  any loss or gain divided among existing partners
• Hilton, problem 7 (proposal A)

9
5. Retirement of a partner

• Assume partners interest is bought out by the
  partnership.
• Bonus method. Difference between BV of old
  partners capital account and payment received
  bonused to/from remaining partners.
• Asset revaluation based on payment, with any loss
  or gain divided among all partners
• Example Retirement of partner

10
6. Liquidation of a partnership

• Realization of assets (conversion to cash)
• Allocation of gains and losses to partners
  according to profit-and-loss-sharing ratio
• Payment to creditors
• Payment of loans from partners
• Distribution of remaining assets to partners
• Hilton, problem 10