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Understanding Partnership Accounting Principles

Aug 22, 2024

Accounting for Partnership

Major Stages of Partnership

  1. Formation: Establishment of a partnership.
  2. Operation: Allocation of profits and losses.
  3. Dissolution: Change in ownership interest or retirement of a partner.
  4. Liquidation: Termination of operations, can be lump sum or installment.

Focus: Formation of Partnership

  • Measure assets and liabilities at fair market value.
  • Total capital is derived from the formula: Assets - Liabilities.
  • Partner capital balances are established based on fair market values.

Problem 1 Overview

  • Questions:
    • A: Capital of partners upon formation.
    • B: Capital balances equal to profit and loss (P&L) ratio.
    • C: Total assets of the partnership.

Partner Details

  • Partners: Pinochle and McGinn Hawa
  • P&L Ratio: 72% Pinochle, 32% McGinn Hawa.

Data from Financial Statements

  • Assets: Cash, receivables, inventory, equipment.
  • Liabilities: Accounts payable, capital accounts.

Adjustments Needed for Fair Market Values

  1. Under-depreciated Equipment:
    • Pinochle: -$87,500
    • McGinn Hawa: +$131,250
  2. Allowance for Doubtful Accounts:
    • Pinochle: -$297,500
    • McGinn Hawa: -$196,875
  3. Worthless Inventories:
    • Pinochle: -$21,875
    • McGinn Hawa: -$15,312

Adjusted Capital Balances

  • Pinochle: $2,218,125
  • McGinn Hawa: $1,975,313

Question Responses

  • A: Final Capital Balances
    • Pinochle: $2,218,125
    • McGinn Hawa: $1,975,313
  • B: Equal capital balances based on P&L ratio:
    • Pinochle: $2,935,407
    • McGinn Hawa: $1,258,031
  • C: Total Assets:
    • Final answer: $5,812,188

Problem 2 Overview

  • Partners: Health and Fitness
  • P&L Ratio: 75% Health, 25% Fitness.

Partner Adjustments

  • Health: Adjusted Capital: $80,000
  • Fitness: Adjusted Capital: $285,000

Final Answers for Problem 2

  • Adjusted Capital Balance (Fitness): $285,000
  • Capital Credit for Health: $273,750

Key Notes

  • Adjustments affect capital balances based on fair market values.
  • Important to understand the implications of the P&L ratio in capital allocation.
  • Always reflect the correct fair market values during formation.

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