Partnership

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Partnership
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I. Purchase of an Interest from Existing Partners

• A new partner may be admitted in an existing
  partnership by purchasing an interest directly
  from the existing partners.
• The old partnership is dissolved, its book is
  closed, and a new partnership agreement governs
  the continuing business operations.

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Example 1

• Alfano and Bailey are partners with capital
  balances 50,000 each (total investment
  100,000). They share profit and loss equally.
  Cobb purchases one-half of Alfanos interest from
  Alfano for 25,000, and a new partnership of
  Alfano, Bailey, and Cobb is formed such that
  Alfano and Cobb each have a 25 interest in the
  capital and profit of new partnership. Baileys
  capital is unchanged.

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Example 1

• Journal entry o record Cobbs admission into the
  partnership with purchase of one-half of Alfanos
  interest

Alfano Capital Cobb Capital 25,000 25,000
Cobbs payment of 25,000 for a 25 interest in
the capital and future income of partnership
implies a total valuation for partnership of
100,000 (25,000 0.25). The net assets of old
partnership were recorded at 100,000, so no
basis for revaluation arises.
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Example 2

• Alfano and Bailey have capital balances of
  50,000 and 40,000 respectively. They share
  profit equally. They agree to take Cobb into
  partnership with a payment of 25,000 directly to
  Alfano. The partners agree that half of Alfanos
  capital balance is to be transferred to Cobb,
  that net assets are not revalued, future profits
  will be shared 25, 50, and 25 to Alfano,
  Bailey, and Cobb, repectively.

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Example 2
Old Partnership Old Partnership Old Partnership New Partnership New Partnership New Partnership
Capital Investment Income Interest Capital Investment Income Interest
Alfano 50,000 5/9 50 25,000 5/18 25
Bailey 40,000 4/9 50 40,000 8/18 50
Cobb 25,000 5/18 25
Total 90,000 90,000
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Example 3 Revaluation-Goodwill Approach

• Alfano and Bailey have capital balances of
  50,000 and 40,000 respectively. They share
  profit equally. They agree to take Cobb into
  partnership with a payment of 50,000 to
  partners. Cobb is to have 50 interest in the
  capital and income of the new partnership. Alfano
  and Bailey will each have 25 interest in the
  capital and income of the new partnership.

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Example 3 Revaluation-Goodwill Approach

• Cobbs 50,000 payment for 50 interest for both
  capital and future income implies a 100,000
  valuation for total partnership assets. If assets
  are to be revalued, the revaluation should be
  recorded prior to Cobbs admission to the
  partnership. The partnership would record the
  revaluation as follows

Goodwill (100,000 - 90,000) Alfano Capital (10,000 2) Bailey Capital (10,000 2) 10,000 5,000 5,000
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Example 3 Revaluation-Goodwill Approach

• The previous entry recording goodwill of 10,000
  gives Alfano and Baley capital balances of
  55,000 (50,0005,000) and 45,000
  (40,0005,000). If equal amounts of capital are
  to be transferred to Cobb, the entry to record
  Cobbs admission to the partnership is

Alfano Capital (50,000 2) Bailey Capital (50,000 2) Cobb Capital 25,000 25,000 50,000
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Example 3 Revaluation-Goodwill Approach

• Capital Balances

Before Revaluation Revaluation After Revaluation Capital transferred Capital after Transferred
Alfano 50,000 5,000 55,000 -25,000 30,000 (30)
Baley 40,000 5,000 45,000 -25,000 20,000 (20)
Cobb 50,000 50,000 (50)
Total 90,000 10,000 90,000 0 100,000
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Example 3 Revaluation-Goodwill Approach

• Alternatively, it is desirable to realign the
  capital Alfano and Bailey in the new partnership
  such that each will have a 25 interest in the
  capital and income of new partnership. Total
  valuation for partnership is 100,000 (50,000
  40,000 goodwill, 10,000). A 25 interest in
  the capital and income of new partnership equals
  25,000 (25 x 100,000).

Before Revaluation Revaluation After Revaluation Capital transferred Capital after Transferred
Alfano 50,000 5,000 55,000 -30,000 25,000 (25)
Baley 40,000 5,000 45,000 -20,000 25,000 (25)
Cobb 50,000 50,000 (50)
Total 90,000 10,000 90,000 0 100,000
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Example 3 Revaluation-Goodwill Approach

• Then, the entry to record Cobbs admission to the
  partnership is

Alfano Capital (55,000 - 25,000) Bailey Capital (45,000 - 25,000) Cobb Capital 30,000 20,000 50,000
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Example 4 Non-revaluation-Bonus Approach

• Alfano and Bailey have capital balances of
  50,000 and 40,000 respectively. They agree to
  take Cobb into partnership with a payment of
  50,000 to partners. and the assets of the new
  partnership are not revalued, but equal amount of
  capital are to be transferred to Cobb, and Cobb
  is to have 50 interest in the capital and income
  of the new partnership.
• Because assets are not revalued, the total assets
  are still 90,000. Cobbs capital after transfer
  is 45,000 (50 x 90,000), so each of Alfano and
  Bailey capital is transferred to Cobb 22,500
  (45,000 2).

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Example 4 Non-revaluation-Bonus Approach

• Equal amounts of capital and equal rights are
  transferred by Alfano (22,500) and Bailey
  (22,500) to Cobb, so each receiving 25,000
  (50,000 2) cash from Cobb. Each of the old
  partners receives 2,500 in excess of the amount
  of book value transferred (25,000 received less
  22,5000 capital transferred). The capital
  accounts before and after the admission of Cobb
  are as follows

Per Books Capital transferred Capital after Transferred
Alfano 50,000 -22,500 27,500 (30.6)
Baley 40,000 -22,500 17,500 (25)
Cobb 45,000 45,000 (50)
Total 90,000 0 90,000
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Example 4 Non-revaluation-Bonus Approach

• The entry to record the transfer is

Alfano Capital (45,000 2) Bailey Capital (45,000 2) Cobb Capital 22,500 22,500 45,000
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Example 4 Non-revaluation-Bonus Approach

• Alternatively, if Alfano and Bailey desire that
  in the new partnership each of them will have a
  25 interest in the capital and income of new
  partnership, and assets are not revalued.Total
  valuation for partnership is still 90,000
  (50,000 40,000). A 25 interest in the
  capital and income of new partnership equals
  22,500 (25 x 90,000).

Per Books Capital transferred Capital after Transferred
Alfano 50,000 -27,500 22,500 (25)
Baley 40,000 -17,500 22,500 (25)
Cobb 45,000 45,000 (50)
Total 90,000 0 90,000
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Example 4 Non-revaluation-Bonus Approach

• The entry to record the transfer is

Alfano Capital (50,000 - 22,500) Bailey Capital (40,000 - 22,500) Cobb Capital 27,500 17,500 50,000
Alfano would receive 30,000 of the amount paid
by Cobb (50,000) and Bailey will receive
20,000.(See goodwill approach)
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II. Investing in an Existing Partnership

• A new partner may be admitted into an existing
  partner by investing cash or other assets in the
  business or by bringing clients or abilities into
  business that will contribute to future
  profitability.

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II.1. Partnership investment at book value

• Andrew and Boyles have capital balances 40,000
  each and share profit equally. They agree to
  admit Criner to a one-third interest in capital
  and profit of a new Andrew, Boyles, and Criner
  partnership for 40,000, Criners 40,000
  investment is equal to the capital interest that
  she receives(80,000 40,000) 3, so the
  issue of revaluation does not arise.

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II.1. Partnership investment at book value

• This entry is to record Criners 40,000 cash
  investment for a one-third interest in
  partnership capital and income

Cash Criner Capital 40,000 40,000
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II.2. Partnership assets revalued (Goodwill to
old partners)

• Andrew and Boyles have capital balances 40,000
  each and share profit equally. They agree to
  admit Criner to a one-third interest in capital
  and profit of a new Andrew, Boyles, and Criner
  partnership for a cash investment of 50,000.
• Because Criner is willing to invest 50,000 for a
  one0third interest in the 80,000 recorded assets
  plus her 50,000 investment (130,000), the
  implication is that the old partner had
  unrecorded asset values (or goodwill).

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II.2. Partnership assets revalued (Goodwill to
old partners)

• The fair value of unrecorded assets is determined
  by referring to Criners investment. By
  implication, the fair value of of the new
  partnerships assets is 150,000 (50,000
  1/3). The fair value of unrecorded assets is
  20,000 150,000 (80,000 50,000).

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II.2. Partnership assets revalued (Goodwill to
old partners)

• If the assets contributed by the old partnership
  are revalued, the following entries are made

Goodwill 150,000 130,000) Andrew Capital (20,000 2) Boyles Capital (20,000 2) Cash Criner Capital 20,000 50,000 10,000 10,000 50,000
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II.2. Partnership assets revalued (Goodwill to
old partners)

• The summary of balances before and after
  revaluation is as follows

Before Revaluation Revaluation After Revaluation New Investment Capital after Investment
Andrew 40,000 10,000 50,000 50,000 (1/3)
Byles 40,000 10,000 50,000 50,000 (1/3)
Cruner 50,000 50,000 (1/3)
Total 80,000 20,000 100,000 50,000 150,000
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II.3. Partnership assets not revalued (Bonus to
old partners)

• Andrew and Boyles have capital balances 40,000
  each and share profit equally. They agree to
  admit Criner to a one-third interest in capital
  and profit of a new Andrew, Boyles, and Criner
  partnership for a cash investment of 50,000.They
  agree that partnership assets are not revalued.

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II.3. Partnership assets not revalued (Bonus to
old partners)

• Partnership net assets are increased only by the
  amount of new investment. The new partners
  capital account is credited for her one-third
  interest in 130,000 (80,000 book value of old
  partnership 50,000 contributed by Criner).
  Capital account for the new partner is 43,333
  (30,000 3 partners).
• The difference between the investment
  contributed by Criner (50,000) and Criners
  capital account (43,334), namely 6,666 is
  distributed to Andrew and Boyles capital account
  (3,333 each), as a bonus to old partners.

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II.3. Partnership assets not revalued (Bonus to
old partners)

• The summary of balances before and after
  revaluation is as follows

Per Books Investment Capital after Investment
Andrew 40,000 3,333 43,333 (1/3)
Byles 40,000 3,333 43,333 (1/3)
Cruner 43,334 43,334 (1/3)
Total 80,000 50,000 130,000
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II.3. Partnership assets not revalued (Bonus to
old partners)

• If partners decide that assets are not revalued,
  the entry to record Criners attendance into the
  partnership is as follows

Cash Andrew Capital Boyles Capital Criner Capital 50,000 3,333 3,333 43,334
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II.4. Partnership assets revalued (Goodwill to
new partner)

• Suppose that Andrew and Boyles agreed to admit
  Criner in partnership for a 40 interest in the
  capital and profit with investment of 50,000.
  The implication is that Criner is bringing
  goodwill into partnership.
• The total value of partnership is determined by
  reference to the 60 (100 - 40) interest
  retained in new partnership capital and profit by
  Andrew and Boyles. Total capital of new
  partnership is 133,333 (80,000 assumed to
  fairly value 60). Criner capital balance is
  53,333 (133,333 - 80,000). Goodwill for Criner
  is 3,333 (53,333 - 50,000)

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II.4. Partnership assets revalued (Goodwill to
new partner)

• The summary of balances before and after
  revaluation is as follows

Per Books Investment plus goodwill Capital after Investment
Andrew 40,000 40,000 (30)
Byles 40,000 40,000 (30)
Cruner 53,333 53,333 (40)
Total 80,000 53,333 133,333
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II.4. Partnership assets revalued (Goodwill to
new partner)

• The partnership records the admission of Criner
  as follows

Cash Goodwill Criner Capital 50,000 3,333 53,333
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II.5. Partnership assets are not revalued (Bonus
to new partner)

• Andrew and Boyles agreed to admit Criner in
  partnership for a 40 interest in the capital and
  profit with investment of 50,000. The bonus
  procedure can be used to ensure that the
  beginning partnership capital balances reflect
  the profit sharing arrangement percentages.
• Total assets of new partnership are 130,000
  (80,000 50,000). Criners share is 52,000
  (40 x 130,000), but Criner contributed only
  50,000. The 2,000 difference (52,000 -
  50,000) is a bonus to Criner. Partnership assets
  are not revalued, the excess 2,000 is credited
  to Criners account must be charged against the
  capital account of Andrew and Boles, 1,000 each.

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II.5. Partnership assets are not revalued (Bonus
to new partner)

• The summary of balances before and after
  revaluation is as follows

Per Books Investment Capital after Investment
Andrew 40,000 (1,000) 39,000 (30)
Byles 40,000 (1,000) 39,000 (30)
Cruner 52,000 52,000 (40)
Total 80,000 50,000 130,000
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II.5. Partnership assets are not revalued (Bonus
to new partner)

• The partnership records the admission of Criner
  as follows

Cash Andrew Capital Boyles Capital Criner Capital 50,000 1,000 1,000 52,000
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III. Dissolution of a Continuing
Partnershipthrough Death or Retirement
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Dissolution of a Continuing PartnershipThrough
Death or Retirement
Dillinger decides to retire.
The partners agree that the business
is undervalued on the partnership books and that
Dillinger will be paid 92,000.
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Bonus to Retiring Partner
Dillinger, Capital 80,000 Bonnie, Capital
8,000 Clyde, Capital 4,000 Cash 92,0
00
Dillinger, Capital 80,000 Goodwill
12,000 Cash 92,000
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Reevaluation of TotalPartnership Capital
Goodwill (other assets) 30,000 Bonnie,
Capital 12,000 Clyde, Capital
6,000 Dillinger, Capital 12,000
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Payment to Retiring PartnerLess than Capital
Balance
Suppose that Dillinger is paid 72,000 in final
settlement of his capital interest.
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Overvalued Assets Written Down
Bonnie, Capital 8,000 Clyde, Capital
4,000 Dillinger, Capital 8,000 Net
assets 20,000
Dillinger, Capital 72,000 Cash 72,000
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Bonus to Continuing Partners
Dillinger, Capital 80,000 Bonnie,
Capital 5,333 Clyde, Capital
2,667 Cash 72,000