Beams11 - Ppt16-Partnership Formation Cyber PDF

Partnerships – Formation, Operations, and
Changes in Ownership Interests
4: ADMITTING A NEW
PARTNER
Copyright ©2012 Pearson Education,

16-1
Inc. Publishing as Prentice Hall
Admitting a New Partner
There are three methods of entry for a new
partner into an existing partnership:
1. A current partner assigns interest to new
partner.
2. New partner purchases interest from
existing partner.
 Goodwill method
 Bonus method
3. New partner invests directly in partnership.
 Goodwill method
 Bonus method
16-2
Assignment
Assignment gives the assignee the right to a
share of future earnings and share of assets in
liquidation
 Not a partner
 No share in management
Old Partner Capital XXX
Assignee Capital XXX
Note that this means one partner can not make

the decision to admit a new partner into the
partnership, only to legally assign the financial
rights of ownership.
16-3
Buy from Partner: Simple
Abby and Bing have capital balances of $50
each and each have a 50% interest in the firm.
Cobb buys half of Abby's interest for $25.
Abby Capital 25
Cobb Capital 25
Before After
Capital Share Capital Share
Abby $50 50% $25 25%
Bing 50 50% 50 50%
Cobb 25 25%
Total $100 $100
16-4
Buy from Partner: Goodwill
Dawn and Ed have capital of $50 and $40, each
with 50% interest.
Fay will pay $60 directly to the partners and
receive 50% interest in the firm. Dawn and Ed
each keep 25%. Assets are at fair value.
Implied value of firm, $60/.50 120
Old capital, $50 + 40 90
Goodwill 30
The goodwill increases Dawn & Ed's capital by

$15 each.
16-5
Buy from Partner: Goodwill (cont.)
After
Before Revaluation revaluation Transfer Final
Dawn $50 $15 $65 ($35) $30
Ed 40 15 55 (25) 30
Fay 60 60
Total $90 $120 $120
Presumably, Fay paid $35 to Dawn and $25 to Ed.
If the partners had not wanted to realign the

capital, the capital of Dawn and Ed would each be
reduced by $30 to transfer the $60 to Fay.
16-6
Buy from Partner: Bonus
If Dawn and Ed had decided not to revalue the
assets or record goodwill, the bonus method is
used. Before Transfer Final
Dawn $50 ($27.5) $22.5
Ed 40 (17.5) 22.5
Fay 45.0 45.0
Total $90 $90.0
Fay's capital is 50%(90) = $45.

Dawn and Ed Capital accounts are adjusted to
their new balances 25%(90) = $22.5
16-7
Entries for Purchase from Partner
Entries for Fay's admission, under goodwill
and bonus methods:
Goodwill 30
Dawn Capital 15
Ed Capital 15
Dawn Capital 35
Ed Capital 25
Fay Capital 60
Goodwill method, aligning capital accounts
Dawn Capital 27.5
Ed Capital 17.5
Fay Capital 45
Bonus method, aligning capital accounts
16-8
New Partner Investment:
Goodwill to Old Partners
Al and Bev each have capital balances of $40
and share equally in the firm. Cal will be
admitted with an investment of $50 cash.
All three will have equal shares, and net assets
are at fair value. Goodwill will be recorded.
Implied value of firm, $50/(1/3) $150
Old capital, $40 + 40 $80
Additional investment 50 130
Goodwill $20
Cal: $130*1/3 = $43.3, but he pays $50 … so goodwill
goes to old partners. Implied firm value is based on
Cal's investment.
16-9
Goodwill to Old Partners (cont.)
Re- After re-
Before valuation valuation Investment Final
Al $40 $10 $50 $50
Bev 40 10 50 50
Cal $50 50
Total $80 $100 $150
Capital of $80 at the start, increases by the

$20 goodwill and the $50 cash investment.

16-10
Goodwill to New Partner
Al and Bev each have capital balances of $40
and share equally in the firm. Cal will be
admitted with an investment of $50 cash.
Cal will be given a 40% share; Al and Bev will
each have 30%, and net assets are at fair value.
Goodwill will be recorded.
Implied value of firm, $80/(.60) $133.3
Old capital, $40 + 40 $80
Additional investment 50 130.0
Goodwill $3.3
Cal: $130*40% = $52, but he pays $50 … so goodwill goes
to new partner. Implied firm value is based on old partners'
capital and retained interest.
16-11
Goodwill to New Partner (cont.)
Re- After re-
Before valuation valuation Investment Final
Al $40 $40 $40.0
Bev 40 40 40.0
Cal $3.3 3.3 $50 53.3
Total $80 $83.3 $133.3
Capital of $80 at the start, increases by the

$3.3 goodwill and the $50 cash investment.

16-12
New Partner Investment: Bonus
Al and Bev decide not to revalue the business
assets, and Cal invests $50 cash in the
business for a 40% interest.
Before Investment Bonus Final
Al $50 ($3) $47
Bev 40 (3) 37
Cal $50 6 56
Total $90 $140
Cal's new capital = 1/3 of the total $140. Since

he invests $50 cash for a $56 interest, the $6
bonus is transferred from the old partners.
16-13
Entries for Investment in Business
Entries for Cal's investment, under goodwill
and bonus methods:
Goodwill 20
Al Capital 10
Bev Capital 10
Cash 60
Cal Capital 60
Goodwill method, goodwill to old partners
Cash 50
Al Capital 3
Bev Capital 3
Cal Capital 56
Bonus method, bonus to new partner
16-14
5: DEATH OR RETIREMENT
OF A PARTNER

16-15
Dissociation
Firm value, according to the Uniform
Partnership Act, is the greater of
 Liquidation value
 Sales value as a going concern without the
dissociated partner
Payment to exiting partner may be
 Equal to existing capital
 More than existing capital
 Implied goodwill or bonus to exiting partner
 Less than existing capital
 Write down overvalued assets, or bonus to
remaining partners
16-16
Payment to Exiting Partner
Mo, Nel, and Owen are partners with capital
balances and profit-sharing percentages, shown
respectively, as follows:
Owen retires, and his partnership interest is

paid out by the partnership.
16-17
Payment Equals Partner Capital
Owen Capital 80
Cash 80
The Mo, Nel, and Owen partnership would be

dissolved. Mo and Nel could continue the
partnership, but would need to establish a new
partnership agreement if a partner’s retirement
was not addressed in the original partnership
agreement.
16-18
Payment Exceeds Partner Capital
If Owen is paid $92,000 in final settlement of

his partnership interest, the excess may be
treated as
1. A bonus to Owen, or
2. Goodwill, in the amount of the excess, or
3. A revaluation of partnership capital based
on the fair value implied by the excess.

16-19
Excess Payment:
Bonus to Exiting Partner
Owen Capital 80
Mo Capital 8
Nel Capital 4
Cash 92
By treating the excess payment as a bonus to

Owen, Mo and Nel each have their capital
accounts reduced by their relative profit
sharing ratios of 40:20, for the total amount of
the $12,000 bonus amount.
16-20
Excess Payment:
Goodwill Recorded
Owen Capital 80
Goodwill 12
Cash 92
By treating the excess payment as an

indication that partnership assets were
undervalued, Goodwill is recorded. Note
that Mo and Nel’s capital accounts are not
revalued.
16-21
Excess Payment:
Used to Revalue Partnership Capital
Goodwill 30
Mo Capital 12
Nel Capital 6
Owen Capital 12
The excess payment is used to determine the
implied fair value of the partnership.
$12,000 excess / Owen’s 40% share =
implied partnership under-valuation of $30,000
Owen Capital 92
Cash 92
The exiting partner is then paid the amount of
his capital account.
16-22
6: LIMITED PARTNERSHIPS

16-23
Limited Partnerships
Limited partnerships must have one or
more general partners with unlimited
liability for partnership debt.
There may be any number of limited

partners.
 Excluded from participating in management
 Limited liability for partnership debt
 Partnership agreement must be in writing,
signed and filed
16-24
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16-25

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Partnerships – Formation, Operations, and

Changes in Ownership Interests

Copyright ©2012 Pearson Education,

Note that this means one partner can not make

The goodwill increases Dawn & Ed's capital by

Presumably, Fay paid $35 to Dawn and $25 to Ed.

If the partners had not wanted to realign the

Fay's capital is 50%(90) = $45.

Capital of $80 at the start, increases by the

Copyright ©2012 Pearson Education,

Capital of $80 at the start, increases by the

Copyright ©2012 Pearson Education,

Cal's new capital = 1/3 of the total $140. Since

Copyright ©2012 Pearson Education,

Owen retires, and his partnership interest is

The Mo, Nel, and Owen partnership would be

If Owen is paid $92,000 in final settlement of

Copyright ©2012 Pearson Education,

By treating the excess payment as a bonus to

By treating the excess payment as an

Copyright ©2012 Pearson Education,

There may be any number of limited

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