ACC 405 Module 7 Project Two Example

Three Ridges Sugarworks: Accounting for a Partnership From Formation Through Liquidation

[Student Name]

Southern New Hampshire University

ACC 405: Advanced Accounting

Project Two

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Three Ridges Sugarworks: Accounting for a Partnership From Formation Through Liquidation

Introduction

Three sugarmakers in the hills west of Concord, New Hampshire, decided to stop competing for the same buyers and form a partnership, Three Ridges Sugarworks. Each brought something different: one a sugarhouse, one equipment and one cash and the willingness to run the business. Their partnership agreement sets capital at the fair value of each contribution, pays the managing partner a salary, credits 6 percent interest on beginning capital and divides the rest 40, 30 and 30 percent. This project records the partnership's formation, first-year income allocation, the admission of a fourth partner and, years later, its liquidation (Hoyle et al., 2021).

Formation

Table 1. Partners' Contributions on Formation

The sugarhouse is recorded at its $140,000 appraised value, not Avery's depreciated cost, because the partnership is a new entity acquiring the asset and each partner's capital should reflect what he or she actually contributed. The partnership assumes the $40,000 mortgage, so Avery's capital is the net value contributed. Blake's equipment is recorded at its $120,000 fair value for the same reason. For tax purposes, by contrast, contributed property generally carries over the partner's tax basis (Internal Revenue Service, 2024), which is one reason partnership book and tax capital accounts often differ.

First-Year Income Allocation

The partnership earned $96,000 in its first season.

Table 2. Allocation of $96,000 Net Income

Each step is applied in order. If income had been only $40,000, the salary and interest would still be allocated in full, and the $11,600 shortfall would be charged to the partners in the 40-30-30 ratio. With drawings of $15,000 for Avery, $15,000 for Blake and $25,000 for Carmen, ending capital is $172,360, $125,520 and $103,120, a total of $401,000.

Admitting a Fourth Partner

At the start of the second year, Dana, a sugarmaker with a direct-to-consumer online store, joined by investing $150,000 cash for a 25 percent interest in capital and profits. The partners chose the bonus method, which leaves total capital equal to existing capital plus the new investment.

Table 3. Admission Under the Bonus Method

Dana paid more than her share of book capital, so the existing partners receive a bonus in their old profit ratio. New capital balances are Avery $177,260, Blake $129,195, Carmen $106,795 and Dana $137,750. The new profit ratio gives Dana 25 percent and the original partners the remaining 75 percent in their old 40-30-30 proportions: Avery 30 percent, Blake 22.5 percent and Carmen 22.5 percent. Under the goodwill method, by contrast, the partnership would record goodwill implied by Dana's price and credit it to the old partners, increasing total capital; the bonus method avoids recording an intangible not supported by a purchase (Fischer et al., 2016).

Liquidation

Several warm winters later, the partners agreed to dissolve. The partnership held $40,000 of cash and noncash assets with a book value of $600,000, owed $180,000 to creditors, and the partners' capital balances were Avery $160,000, Blake $120,000, Carmen $37,400 and Dana $142,600.

Table 4. Liquidation Schedule

Creditors are paid in full before any partner receives cash. The mortgage on the sugarhouse, by then reduced to its remaining balance, was part of the $180,000 of liabilities and was settled from the sale proceeds when the building was sold. The $180,000 loss on sale is shared in the profit ratio, leaving Carmen with a $3,100 deficit. Carmen has no personal assets to contribute, so the other partners absorb her deficit in their relative ratios, 30, 22.5 and 25 out of 77.5. If Carmen later pays, she will owe the others the amounts they absorbed.

Lessons From the Partnership's Life

At every stage the partnership agreement, not a standard, decided the accounting. Fair value at formation protected Blake and Avery from contributing appreciated property at historical cost. The salary and interest provisions compensated Carmen for her time and the others for their capital before splitting the rest. The bonus method avoided recording goodwill the market had not confirmed. And the liquidation followed the rule that creditors come first, then the partners' capital accounts as adjusted for losses. A well-drafted agreement would also have addressed what happens when a partner cannot cover a deficit; Carmen's situation shows why that clause matters. The partners might also have agreed in advance to an installment liquidation, distributing cash as assets were sold rather than waiting for every sale to close. That approach requires a safe-payment schedule that assumes all remaining assets are worthless and that any partner with a potential deficit will not pay, so that no partner receives cash that might later have to be returned. For a firm whose main assets were land, a building and equipment that sold over several months, the safe-payment approach would have let Avery and Dana, who had the largest balances, receive part of their capital earlier.

Conclusion

Three Ridges Sugarworks formed with $360,000 of capital recorded at fair value, allocated $96,000 of first-year income through salary, interest and a residual ratio, admitted Dana for $150,000 with a $12,250 bonus to the original partners and, when it dissolved, paid creditors first and distributed $280,000 to the partners after the others absorbed Carmen's $3,100 deficit.

References

Fischer, P. M., Tayler, W. J., & Cheng, R. H. (2016). Advanced accounting (12th ed.). Cengage Learning.

Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2021). Advanced accounting (14th ed.). McGraw Hill.

Internal Revenue Service. (2024). Partnerships (Publication 541). U.S. Department of the Treasury.