Advanced Accounting Final Ch. 15

Admission by Purchase of Interest

A new partner often "buys-out" another partner's interest and replaces them Can also just purchase a portion of all partner's existing interest All remaining partners are required to approve if the new partner will have the right to participate in management Even if not approved, the new partner can participate in profit-sharing If purchasing a partner's interest, we simply move the leaving partner's capital into an account for the new partner If purchasing a portion of all partners' interest, we transfer portions of their interest to the new partner

20,000 to get 10% 20,000 / .1 = 200,000 BV NA after contribution = 80,000 + 20,000 + 20,000 = 120,000 BV NA increase by 80,000 1. Revalue Debit GW 80,000 Credit Capital: King 48,000 Credit Capital: Wilson 32,000 2. Admission Debit Cash 20,000 Credit Capital: Goldman 20,000

King and Wilson have $80,000 and $20,000 of capital in a partnership respectively and share profits/losses in a 6:4 ratio. Goldman desires to enter the partnership with a contribution of $20,000 to the partnership. Goldman will receive 10% interest in partnership net assets as a result. Use the Goodwill Method to record the admission listed on the prior slide. First, revalue the partnership assets, then record Goldman's admission.

Excess is a bonus to existing partners NA increases 20,000 Pre-purchase NA = 80,000 + 20,000 = 100,000 New NA = 120,000 120,000 x .1 = 12,000 20,000 - 12,000 = 8,000 8,000 Bonus K: 8,000 * .6 = 4,800 W: 8,000 * .4 = 3,200 Debit Cash 20,000 Credit Capital: King 4,800 Credit Capital: Wilson 3,200 Credit Capital: Gold 12,000

King and Wilson have $80,000 and $20,000 of capital in a partnership respectively and share profits/losses in a 6:4 ratio. Goldman desires to enter the partnership with a contribution of $20,000 to the partnership. Goldman will receive 10% interest in partnership net assets as a result. Use the bonus method to record this admission

Partnership Liquidation

Upon liquidation, partnerships must do three primary things 1.Convert all nonmonetary assets into cash (sell them) 2.Pay off all outstanding debts 3.Distribute remaining assets to partners (if any) As assets are sold, the gains and losses we would normally record will offset against partner capital accounts There may also be liquidation expenses for legal items Cash and capital should be the only remaining accounts before final close

as soon as the makeup of the partners changes. A new partnership is immediately formed.

a partnership dissolves ____

Extra and deficiencies go to remaining partners. Windsor is gone, 0 Capital Balance. P FV = 180,000 W % = 20% x 180,000 = 26,000 D = 50% S = 30% 5:3 D = 5/8 x 16,000 = 10,000 S = 3/8 x 16,000 = 6,000 Debit Capital: W 10,000 Debit Capital: S 6,000 Debit Capital: Duncan 10,000 Credit Cash 26,000

Duncan, Smith, and Windsor run a partnership, and Windsor is looking to withdrawal. Duncan 70,000, 50% Smith 20,000, 30% Windsor 10,000, 20% Total Capital = 100,000 The partnership is immediately appraised. Its total fair value is estimated to be $180,000. The increase in fair value over book value is due to land that is undervalued by $50,000 and perceived goodwill of $30,000 based on the reputation of the business. The articles of partnership state that the withdrawing partner will receive, upon withdrawal, cash equal to their share of the value of the partnership. This share of value is based on the partner's profit-sharing ratio. Bonus Method:

Prior NA = 100,000 FV = 180,000 NA Increase 80,000 D = 50% S = 30% W = 20% 1. Revalue Debit GW 30,000 Debit Land 50,000 Credit C: S 24,000 Credit C: D 40,000 Credit C: W 16,000 Close W Capital Account 10,000 + 16,000 = 26,000 180,000 x .2 = 26,000 2. Withdraw Debit C: W 26,000 Credit Cash 26,000

Duncan, Smith, and Windsor run a partnership, and Windsor is looking to withdrawal. Duncan 70,000, 50% Smith 20,000, 30% Windsor 10,000, 20% Total Capital = 100,000 The partnership is immediately appraised. Its total fair value is estimated to be $180,000. The increase in fair value over book value is due to land that is undervalued by $50,000 and perceived goodwill of $30,000 based on the reputation of the business. The articles of partnership state that the withdrawing partner will receive, upon withdrawal, cash equal to their share of the value of the partnership. This share of value is based on the partner's profit-sharing ratio. GW Method:

1. Debit Cash 15,000 Credit C: M 4,200 Credit C: H 2,800 Credit Inventory 22,000 2. Debit Cash 9,000 Debit C: M 1,800 Debit C: H 1,200 Credit A/R 12,000 3. Debit Cash 29,000 Debit C: M 7,200 Debit C: H 4,800 Credit PPE 41,000 4. Debit C: M 1,800 Credit C: H 1,200 Credit Cash 3,000 5. Debit Liabilities 32,000 Credit Cash 32,000 Cash = 45,000 (beg) + 15,000 + 9,000 + 29,000 - 3,000 - 32,000 = 63,000 (End) M = 50,000 (beg) - 4,200 - 1,800 - 7,200 - 1,800 = 35,000 (end) H = 38,000 - 2,800 - 1,200 - 4,800 - 1,200 = 28,000 (end) Debit C: M 35,000 Debit C: H 28,000 Credit Cash 63,000

Morgan and Houseman partnership is liquidating and has the following BS items. Cash 45,000 A/R 12,000 Inventory 22,000 PPE 41,000 Total A = 120,000 L 32,000 Morgan, Capital 50,000 Houseman, Capital 38,000 Total L + C = 120,000 1.The inventory is sold at auction for $15,000. 2.Only $9,000 of the A/R is collected. The rest is written off. 3.The land, building, and equipment are sold for $29,000. 4.$3,000 is paid for liquidation expenses. 5.All partnership liabilities are paid. Record the required entries, then distribute the remaining assets to the partners. On this slide, record the final distribution of cash to the partners.

buy-in, no change of original partners. buy-out of existing partner

Partners can be admitted in two ways:

Partner Withdrawal

Partners leave for various reasons (death, retirement, change of course) The articles of partnership should explicitly state how this situation should be handled in terms of distributions It's not as simple as distributing cash equal to the partner's capital balance In general, the partnership net assets are revalued (either appraised or agreed-upon) at the time of withdrawal As you may guess, there are two ways to do this...bonus and goodwill

Admission by Contribution to Partnership

Prior examples illustrated admission through payment to the individual partners New partners may also contribute to the partnership to gain admission Increases partnership assets, alters the accounting Two methods for this admission Bonus Method - Similar to Book Value Method discussed earlier Goodwill Method (Revaluation)

Net Assets = Equity = Capital Net Assets = 50,000 + 30,000 + 20,000 = 100,000 Morgan Capital = 100,000 * .2 = 20,000 Debit Capital: Scott 10,000 Debit Capital: Thompson 6,000 Debit Capital: York 4,000 Credit Capital: Morgan 20,000

Scott, Thompson, and York have $50,000, $30,000, and $20,000 of capital in a partnership and share profits/losses in a 2:5:3 ratio. Morgan is looking to purchase interest in the partnership. The existing partners agree to transfer 20% of their interest to Morgan in exchange for $30,000. Record this transaction using the Book Value Method (Partnership Net Assets do not change)

$30,000 for 20% 30,000 / 2 = 150,0000 does not equal BV of 100,000 NA Increase by 50,000. 1: Revalue Debit GW 50,000 Credit Capital: Scott 10,000 Credit Capital: Thompson 25,000 Credit Capital: York 15,000 Morgan paid 30K New Net Assets = 150K x .2 = 30K Transferring interest from existing partners Scott = 50,000 + 10,000 = 60,000 Thompson = 30,000 + 25,000 = 55,000 York = 20,000 + 15,000 = 35,000 2: Admission Debit Capital: Scott 12,000 Debit Capital: Thompson 11,000 Debit Capital: York 7,000 Credit Capital: Morgan 30,000

Scott, Thompson, and York have $50,000, $30,000, and $20,000 of capital in a partnership and share profits/losses in a 2:5:3 ratio. Morgan is looking to purchase interest in the partnership. The existing partners agree to transfer 20% of their interest to Morgan in exchange for $30,000. Use the Goodwill Method to record this admission of Morgan. Use this slide to record the revaluation of the partnership (entry 1) Use the Goodwill Method to record this admission of Morgan. Use this slide to record the admission of Morgan (entry 2) Net Assets will change, revalue partnership based on its implied value