Horngren’s Accounting, Volume 2, 11th Canadian Edition by Tracie Miller-Nobles Solution manual

Balances60,0000034,00018,0008,000
Disbursement of cash to partners(60,000)____________(34,000)(18,000)(8,000)
Balances$         0$         0$         0$         0$         0$        0
 
*Loss = $90,000 – $80,000 = $10,000
              Lauren:        $10,000 × 0.60 = $6,000
              Andrews:     $10,000 × 0.20 = $2,000
              Benroudi:     $10,000 × 0.20 = $2,000

(10 min.) S12-15
General Journal
DateAccount Titles and ExplanationsPost. Ref.DebitCredit
Oct.31Cash 80,000 
  Ryan Lauren, Capital 6,000 
  Alexis Andrews, Capital 2,000 
  Scott Benroudi, Capital 2,000 
       Noncash Assets  90,000
  To sell assets at a loss.   
      
 31Liabilities 30,000 
       Cash  30,000
  To pay liabilities.   
      
 31Ryan Lauren, Capital 34,000 
  Alexis Andrews, Capital 18,000 
  Scott Benroudi, Capital 8,000 
       Cash  60,000
  To pay the partners in final liquidation of the business.   
 
 
(5–10 min.) S12-16
The partners have two options to deal with a negative capital balance in a liquidation:
If the partner has personal assets, then that partner would pay in the balance, that partner is released from further obligation, and the other partners would receive their remaining amounts.
If the partner does not have personal assets, then that partner’s balance would be absorbed using the profit-and-loss-sharing ratio. Benroudi would not be released from further obligation and if he does not sign a promissory note (or signs a note and does not pay), then he could be sued personally by the other partners. The partners would then receive their remaining amounts. In that case, Benroudi’s balance would be absorbed by Lauren ($6,000) and Andrews ($2,000).
 

Exercises
(5–10 min.) E12-1
Giltrow’s errors were as follows:
1.     A partner has unlimited personal liability for the obligations of the partnership. Therefore partnerships are very risky for a partner, especially because each partner can bind the business to a contract within the scope of the partnership’s normal operations.
2.     A partner cannot necessarily take from the business the same assets that he or she invested at the beginning. If the business fails, a partner may lose some or all of the assets he or she invested.
3.     Partnerships pay no business income tax, so they are not subject to double taxation. Instead, all the profits of a partnership are divided among the partners, who then pay personal income tax on their share of the business’s net income.
 
 
(10–15 min.) E12-2
The main advantage of organizing a business as a partnership, rather than as a proprietorship, is the ability to bring together the capital, talents, and experiences of the partners. Two or more owners can provide more capital than can a single owner. Like a proprietorship, the partnership pays no business income tax. Instead, the partnership income is taxed as personal income to the partners.
The partnership form of business has some disadvantages. Partnerships are somewhat like marriages. Euphoria at the start of the venture can turn sour if the partners do not get along well. Each partner can bind the business to a contract that gives every partner unlimited personal liability for the debts of the business if it cannot pay. One partner making some mistakes or acting in an undesirable manner can create losses for the other partner(s). In the extreme case, a partner may grow disenchanted with participation in the business. If a partner leaves the business, the old partnership dies, and reorganization becomes necessary. Preparing a partnership agreement can consume a great deal of time and energy but is definitely worth it to protect the parties engaged in this business arrangement.