Welcome to Accounting Level 3

1
Welcome toAccounting Level 3
2
Introduction

• Colin Morris, C.G.A.
• Financial Reporting Analyst, Agricore United
• E-mail rrcaccounting_at_shaw.ca cmorris_at_rrc.mb.ca

3
Course Delivery

• Visit Instructor Web for additional materials,
  including selected solutions.
• Fundamental Accounting Principles -11th Canadian
  Edition
• PowerPoint presentation for course materials.

4
Course Delivery

• Assignment questions are on course outline.
  Selected solutions are provided on website. All
  questions are reviewed in class.
• Additional problems or examples are done at the
  conclusion of the regular lecture.

5
Course Delivery

• Refer to course outline for items not required
  (bond pricing, Direct Method of cash flows).
• Mid-Term Exam to be marked by instructor.

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Chapter 14Partnerships Part 1

• Characteristics
• Advantages
• Disadvantages
• Distribution of Income (Loss)

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Partnership Form of Organization

• A partnership is an unincorporated association of
  two or more people to pursue a business for
  profit as co-owners.

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Characteristics of General Partnerships

• Partnership Agreement should be in writing but
  may be expressed orally.
• Limited life death, bankruptcy, or expiration
  of the contract period automatically ends a
  partnership.

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Characteristics of General Partnerships

• Not subject to tax on income partners report
  their share of income on personal income tax
  return.
• Co-ownership of Property all partnership assets
  are owned jointly by the partners but claims on
  partnerships assets are based on their capital
  account.

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Characteristics of General Partnerships

• Mutual agency every partner is an agent of the
  partnership and can enter into and bind it to any
  contract within the normal scope of its business.
• Unlimited liability each general partner is
  responsible for payment of all the debts
  partnership if the other partners are unable to
  pay a share.

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Partnership Characteristics

• Limited partnerships have two classes of
  partners, general and limited.
• The general partners assume unlimited liability
  for the debts of the partnership.
• The limited partners assume no personal liability
  beyond their invested amounts and cannot take
  active role in managing the company.

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Partnership Form of Organization

• Limited liability partnership designed to
  protect innocent partners from malpractice or
  negligence claims resulting from the acts of
  another partner. Generally, all partners are
  personally liability for other partnership debts.

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Forming a Partnership

• Each partner's investment is recorded at an
  agreed upon value, normally the fair market value
  of the assets and liabilities at their date of
  contribution.
• Example
• Olivia Tsang invests 7,000 in cash, equipment
  with a fair value of 33,000 and a note payable
  for 10,000 into The Landing Zone. David Breck
  invests 10,000 cash to form a partnership in the
  business.

14
Forming a Partnership
Entry Olivia Tsang

• Entry David Breck

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Dividing Income or Loss

• Any agreed upon method of dividing income or loss
  is allowed.
• If there is no agreement, the net income or loss
  is divided equally.

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Methods of Sharing Earnings

• Stated Fractional Basis
• The easiest way to divide earnings is to give
  each partner an agreed-upon fraction of the
  total.
• (2/3, 1/3 or 3/4, 1/4 or 1/3, 1/3, 1/3 etc.).

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Method of Sharing Earnings

• Based on the Ratio of Investments
• If the business is of a nature that earnings are
  closely related to money invested, a division
  based on the ratio of partners' investment
  (capital accounts) offers a fair sharing method.

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Methods of Sharing Earnings

• Based on Salary and Interest Allowances and the
  remainder in a fixed ratio
• When capital contribution and service
  contribution of the partners are unequal, an
  agreement may be reached whereby earnings are
  allocated first as "interest," then as "salary,"
  and the remainder on a fractional basis.

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Method of Sharing Earnings

• Note
• Partners do not earn interest or salaries.
• These terms are used to reflect the basis for
  allocating earnings (i.e., "interest" is a return
  on investment and "salary" is a return for
  services).

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Method of Sharing Earnings

• Note
• There are NO accounting entries for these
  allocations.
• The only entries that are made are for the final
  distribution of income to the partners.

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Income Allocation Example

• Agreement between Tsang and Breck
• Annual salary allowance of 36,000 to Tsang and
  24,000 to Breck.
• Interest Allowance equal to 10 of each partners
  capital balance.
• Any remaining balance of income or loss shared
  equally.
• Income for the year is 70,000

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Income Allocation Example
Calculate Allocation to Partners

• Entry

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Partnerships Part 1

• Questions??

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Assignment Hints

• Problems
• 14-1A
• c) Balance to be allocated 3,900
• 14-2A
• Plan B Meade 25
• 14-3A
• Part 2 Dolan Capital Dec 31, 2005 364,600