and dynamics of admitting a partner and partner withdrawal Admission and Withdrawal of Partners Partnership Dynamics Partnership interests are negotiable Another person can buy a portion of a partners interest in a partnership The purchaser will now receive their purchased portio ID: 567068
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Slide1
Journal entries and dynamics of admitting a partner and partner withdrawal
Admission and Withdrawal of PartnersSlide2
Partnership DynamicsPartnership interests are negotiable. Another person can buy a portion of a partner’s interest in a partnership. The purchaser will now receive their purchased portion of the partnership income but is not necessarily admitted as a partner, unless the other partners agree to admit the purchaser. Otherwise, the purchasers receives money from the partnership commensurate with the percentage purchased.
When a new partner is admitted by investing cash or other assets in the partnership, the journal entries are the same as the initial formation journal entries. (This is different from purchasing a partnership interest from an existing partner as described above).
The new partner’s percentage of ownership
Can equal the amount invested
Exceed the amount invested or
Be less than the amount invested
When a new partner is
admitted,
a new partnership must be formed. Slide3
Portion of current partner’s interest is sold to someone outside of the partnership
After the partnership has been in business for some time, Perez
has a capital balance of $26,000
and sells 50% of his partnership interest to Rasheed for $18,000.
How would this be recorded on the books of the partnership? At $18,000 or 50% of $26,000?Slide4
Portion of current partner’s interest is sold to someone outside of the partnership
How would this be recorded on the books of the partnership? At $18,000 or 50% of $26,000?
The same holds true if Perez sells his 50% interest for $5,000 or $30,000. The partnership records the sale of a 50% interest in Perez’s capital balance.
The cash given to Perez is between him and Rasheed. The partnership may not even know the amount exchanged.Slide5
A New Partner is AdmittedThe new partner’s interest in the partnershipequals amount invested.
Rasheed invests $22,000 for a 22% interest in the partnershipSlide6
A New Partner is AdmittedThe new partner’s interest in the partnershipexceeds amount invested.
Rasheed invests $42,000 for a 25% interest in the partnership
The existing partners receive a bonus or an increase to their capital accounts because Rasheed was willing to pay more than his partnership interest in order to join the partnership. In this example upon admitting a new partner, the partnership agreement calls for any difference to be shared equally among the existing partners. Slide7
A New Partner is AdmittedThe new partner’s interest in the partnershipis less than amount invested.
Rasheed invests $18,000 for a 25% interest in the partnership
The new partner receives a bonus exemplified as a decrease to the capital accounts of the existing partners because Rasheed paid less than his partnership interest when admitted. In this example, upon
admitting a new partner, the partnership agreement calls for any difference to be shared equally among the existing partners. Slide8
Partner Withdraws from Partnership
Partners
withdraw in one of two ways:
The partner can sell his interest to another. Similar dynamics as when another purchases a partnership interest or
The partnership can distribute cash and/or non-cash assets to withdrawing partner to settle their interest.
Withdrawing partner can receive an amount
Equal to the value of the capital balance
Less than the value of the capital balance
More than the value of the capital balance
However manifested, when partners withdraw, a new partnership must be formed from the remaining partners. Slide9
Withdrawing Partner Receives an Amount Equal to Capital BalanceSlide10
Withdrawing Partner Receives Less than an Amount Equal to Capital Balance
In this example upon withdrawal of a partner, the partnership agreement provides the remaining partners share any difference equally. Slide11
Withdrawing Partner Receives More than an Amount Equal to Capital Balance
In
this example upon
withdrawal of a partner, the partnership agreement provides the remaining partners share any difference equally. Slide12
Withdrawing Partner Receives More than an Amount Equal to Capital Balance
In this example upon withdrawal of a partner, the partnership agreement provides the remaining partners share any difference based on previous ratios.
For example prior to the withdrawal of Rasheed, the partners’ ratios were Zayn 3; Perez 5; and Rasheed 2. How do you allocate the difference of $2,000 between Rasheed’s capital balance and the cash received by him between Zayn and Perez? In this instance, you cannot allocate any of the difference to Rasheed since he is no longer a partner. Thus, you must allocate to the remaining partners based on the previous ratios which must be restated since Rasheed is gone. See below examples of the ratios between “Was” and “Now.” Zahn will get 3/8ths of the $2,000 and Perez will get 5/8ths of the $2,000.