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Accounting for Partnerships

Part 2

• To recognize economic effects. • A new partner may be admitted either by: – 1.ADMISSION OF A PARTNER • The admission of a new partner results in the legal dissolution of the existing partnership and the beginning of a new partnership. . or – 2. Investing assets in the partnership. it is necessary only to open a capital account for each new partner. Purchasing the interest of one or more existing partners.

it may be equal to or different from the capital equity acquired.PROCEDURES IN ADDING PARTNERS Admission of Partner through: Partnership Assets I. Any money or other consideration exchanged is the personal property of the participants and not the property of the partnership. . Purchase of a Partner’s Interest The admission of a partner by purchase of an interest in the firm is a personal transaction between one or more existing partners and the new partner. The price paid is negotiated and determined by the individuals involved.

PROCEDURES IN ADDING PARTNERS When a partner is admitted by investment. both the total net assets and the total partnership capital change. the difference is considered a bonus either to: 1) the existing (old) partners or 2) the new partner. When the new partner’s investment differs from the capital equity acquired. Hello Partnership Assets II. Investment of Assets in Partnership .

Determine the new partner’s capital credit by multiplying the total capital of the new partnership by the new partner’s ownership interest. Determine the amount of bonus by subtracting the new partner’s capital credit from the new partner’s investment. 2. Allocate the bonus to the old partners on the basis of their income ratios.BONUS TO OLD PARTNERS The procedure for determining the new partner’s capital credit and the bonus to the old partners is as follows: 1. . 3. 4. Determine the total capital of the new partnership by adding the new partner’s investment to the total capital of the old partnership.

Determine the amount of bonus by subtracting the new partner’s investment from the new partner’s capital credit. . Determine the new partner’s capital credit by multiplying the total capital of the new partnership by the new partner’s ownership interest. Allocate the bonus from the old partners on the basis of their income ratios. Determine the total capital of the new partnership by adding the new partner’s investment to the total capital of the old partnership. 2.BONUS TO NEW PARTNER The procedure for determining the new partner’s capital credit and the bonus to the new partner is as follows: 1. 3. 4.

Example .

payment from remaining partners’ personal assets or 2.WITHDRAWAL OF A PARTNER • A partner may withdraw from a partnership voluntarily by selling his or her equity in the firm or involuntarily by reaching a mandatory retirement age or by dying. • The withdrawal of a partner may be accomplished by 1. . payment from partnership assets.

Partnership Assets Bye .PAYMENT FROM PARTNERS’ PERSONAL ASSETS • The withdrawal of a partner when payment is made from partners’ personal assets is the direct opposite of admitting a new partner who purchases a partner’s interest. • Withdrawal by payment from partners’ personal assets is a personal transaction between the partners.

there is unrecorded goodwill resulting from the partnership’s superior earnings record. 2. the fair market value of partnership assets is greater than their book value. the remaining partners are anxious to remove the partner from the firm. or 3. BONUS .BONUS TO RETIRING PARTNER A bonus may be paid to a retiring partner when: 1.

. Determine the amount of the bonus by subtracting the retiring partner’s capital balance from the cash paid by the partnership. 2. The procedure for determining the bonus to the retiring partner and the allocation of the bonus to the remaining partners is: 1.BONUS TO RETIRING PARTNER The bonus is deducted from the remaining partners’ capital balances on the basis of their income ratios at the time of the withdrawal. Allocate the bonus to the remaining partners on the basis of their income ratios.

BONUS TO REMAINING PARTNERS The retiring partner may pay a bonus to the remaining partners when: 1. or 3. the partner is anxious to leave the partnership. BONUS . recorded assets are overvalued. the partnership has a poor earnings record. 2.

2. The procedure for determining the bonus to the remaining partners is: 1. Allocate the bonus to the remaining partners on the basis of their income ratios.BONUS TO REMAINING PARTNERS The bonus is added to the remaining partners’ capital balances on the basis of their income ratios at the time of the withdrawal. Determine the amount of the bonus by subtracting the retiring partner’s capital balance from the cash paid by the partnership. .

Example .