Module 8, Partnerships

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Module 8, Partnerships Corporations

• Activity 4, How do you prepare journal entries to
  start a partnership?

2
Review

• In the first section of this activity, we learned
  how to record a transaction to set up a
  partnership from scratch.
• This transaction was recorded in a Cash Receipts
  Journal but could have been recorded in a general
  journal as well.
• It involved either a partner bringing cash or a
  combination of assets/liabilities to the new
  partnership.

3
What if the partnership exists?

• If the partnership already exists, we can still
  add a new partner, however, the transactions to
  record this new partner vary depending on what he
  or she brings to the partnership.

4
The new partner may invest in the partnership 5
ways.

• 1. Straight Cash
• The new partner will contribute the exact same
  amount that each partner already has in their
  capital accounts.

• Transaction
• If the other two partners have
• Partner A 30,000
• Partner B 30,000, then the transaction will be
• DR Cash 30,000
• CR Partner C, Capital 30,000

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A Second Way...

• If the other two partners have
• Partner A and B - 30,000 each
• They will add the capital amounts up (For Example
  it would be 60,000.)
• They will then take that amount and divide by 3
  -60,000/3 20,000
• Each partner should have an equity amount of
  20,000.
• The new partner will pay 10,000 to each partner
  and the new transaction will have to allow for
  the existing partners capital to decrease.
• DR Partner A, Capital 10,000
• DR Partner B, Capital 10,000
• CR Partner C, Capital 20,000

• 2. Total Equity - No Change
• The existing partners will sell the new partner
  one third of their equity combined. The new
  partner will give the money to them personally.

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A third way

• 3. A Smaller Investment for smaller share in
  business.
• The existing partners will sell the new partner a
  part of the ownership which is less than their
  share.
• For example, Partner A and B have an equity
  amount of 30000 each.
• They agree to let in another partner for 1/4
  ownership if he gives them 20,000

• Calculation
• Partner A, Equity 30000
• Partner B, Equity 30000
• Partner C, New 20000
• Total 80,000
• Take the new total 80,000 and divide by 4 --
  80000/4 20,000
• Partner A and B have own 3/4 of the business --
  total equity 60000 Partner C has 1/4 of the
  business 20,000
• Debit Cash 20000
• Credit Partner C, Capital 20000

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A fourth way...

• 4. An smaller investment for equal share in
  business.
• The existing partners will sell the new partner
  an equal part of the ownership for less money
  than each of their equity amounts.
• Why? The business may require a cash injection of
  funds.
• Two transactions - one to record cash and one to
  adjust capital accounts.

• Partner A, 33,000 (change of number for ease of
  calculation)
• Partner B, 33,000
• Partner C, 24,000
• Total 90,000
• The new partner will get 1/3 ownership, but he
  pays only 24,000
• Two transactions One to record the cash and one
  to record the decrease in capital/equity for
  Partner A and B.
• DEBIT Cash 24000
• CREDIT Partner C, Capital 24000
• AND
• DEBIT Partner A, Capital 3000
• DEBIT Partner B, Capital 3000
• CREDIT Partner C, Capital 6000

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A fifth way...

• 5. When goodwill is recognized.
• The existing partners will sell the new partner
  an equal part of the ownership for more money
  than each of their equity amounts.
• Why? The business may be doing really well and it
  is worth it to the new partner.
• Two transactions - one to record cash and one to
  adjust capital accounts.

• Partner A, Capital 30000
• Partner B, Capital 30000
• Partner C, Capital 40000
• Transaction One
• DEBIT Cash 40000
• CREDIT Partner C, Capital 40000
• and
• DEBIT Goodwill 20000
• CREDIT Partner A Capital 10000
• CREDIT Partner B Capital 10000

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Just a minute, What is goodwill?

• Goodwill is an intangible asset -- not physical.
• It means the value of business in excess of the
  total investment of owners.
• If someone is willing to pay more for an equal
  share - that must be evidence that goodwill
  exists. Therefore, this goodwill could be
  considered an asset.
• THE END
• Summary -- Admitting Partners to an Existing
  Businessthe Five Ways.