transactions relating to partners

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Admission and Withdrawal of Partners

When the makeup of the partnership changes, the existing partnership is dissolved.

A new partnership may be immediately formed.

New partner acquires partnership interest by:1. Purchasing it from the other partners, or2. Investing assets in the partnership.

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Purchase of Partnership Interest

A new partner can purchase A new partner can purchase partnership interest directly from partnership interest directly from the existing partners.the existing partners.The cash goes to the partners, not The cash goes to the partners, not

to the partnership.to the partnership. To become a partner, the new To become a partner, the new

partner must be accepted by the partner must be accepted by the current partners.current partners.

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Purchase of Partnership Interest On January 4th, Hector Perez sells one-half of his

partnership interest to Tyrell Rasheed for $18,000. Perez gives up a $13,000 recorded interest in the partnership.

Zayn Perez Rasheed TotalCapital balances before new partner 52,000$ 26,000$ -$ 78,000$ Allocation to new partner (13,000) 13,000 - Capital balances after new partner 52,000$ 13,000$ 13,000$ 78,000$

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Investing Assets in a Partnership

The new partner can gain partnership interest by contributing assets to the partnership.

The new assets will increase the partnership’s net assets.

After admission, both assets and equity will increase.

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Investing Assets in a Partnership On January 4th, Tyrell Rasheed is admitted to the

partnership with a payment of $22,000 cash.

Zayn Perez Rasheed TotalCapital balances before new partner 52,000$ 26,000$ -$ 78,000$ Allocation to new partner 22,000 22,000 Capital balances after new partner 52,000$ 26,000$ 22,000$ 100,000$

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Bonus to Old or New Partners

Bonus to Old Partners

When the current value of a partnership is greater than the

recorded amounts of equity, the old partners usually require a new partner

to pay a bonus when joining.

Bonus to New Partners

The partnership may grant a bonus to a new partner if the business is in

need of cash or if the new partner has exceptional talents.

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Bonus to Old Partners On January 4th, Zayn and Perez agree to accept Rasheed

as a partner upon his investment of $42,000 cash in the partnership. Rasheed is to receive a 25% ownership interest

in the new partnership. Any bonus is attributable to the existing partners and is shared equally.

78,000$ 42,000

120,000 25%

30,000$ Rasheed's equity balance

Equity of Zayn and Perez

Total partnership equityRasheed's ownership percent

Investment by Rasheed

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Bonus to Old Partners On January 4th, Zayn and Perez agree to accept Rasheed

as a partner upon his investment of $42,000 cash in the partnership. Rasheed is to receive a 25% ownership interest

in the new partnership. Any bonus is attributable to the existing partners and is shared equally.

$42,000 - $30,000 = $12,000 × ½ = $6,000

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Bonus to New Partner

78,000$ 18,000 96,000

25%24,000$ Rasheed's equity balance

Equity of Zayn and Perez

Total partnership equityRasheed's ownership percent

Investment by Rasheed

On January 4th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $18,000 cash in the partnership. Rasheed is to receive a 25%

ownership interest in the new partnership. Any bonus is attributable to Rasheed’s excellent business skills.

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Bonus to New Partner On January 4th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $18,000 cash in the partnership. Rasheed is to receive a 25%

ownership interest in the new partnership. Any bonus is attributable to Rasheed’s excellent business skills.

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$18,000 - $24,000 = ($6,000) × ½ = ($3,000)

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Withdrawal of a Partner

A partner can withdraw A partner can withdraw in two ways:in two ways:

The partner can sell his/her The partner can sell his/her partnership interest to partnership interest to another person.another person.

The partnership can The partnership can distribute cash and/or other distribute cash and/or other assets to the withdrawing assets to the withdrawing partner.partner.

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Withdrawal of a Partner At the date of the withdrawal of Perez, the partners have the following

capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed - $38,000. The partners share income and loss equally. Perez is to receive

$38,000 cash upon withdrawal from the partnership.

No BonusNo Bonus

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Bonus to Remaining PartnersBonus to Remaining Partners

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Capital balance $ 38,000 Cash settlement 34,000 Bonus 4,000 Times 50%Bonus to each partner $ 2,000

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Capital balance $ 38,000 Cash settlement 40,000 Deficiency 2,000 Times 50%To each partner $ 1,000




Bonus to Withdrawing PartnerBonus to Withdrawing Partner

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Death of a PartnerA partner’s death dissolves a partnership. A deceased A partner’s death dissolves a partnership. A deceased partner’s estate is entitled to receive his or her equity. The partner’s estate is entitled to receive his or her equity. The partnership agreement should contain provisions for partnership agreement should contain provisions for settlement. These provisions usually require:settlement. These provisions usually require:1.1.Closing the books to determine income or loss since the Closing the books to determine income or loss since the end of the previous period, andend of the previous period, and2.2.Determining and recording current market values for both Determining and recording current market values for both assets and liabilities.assets and liabilities.Settlement of the deceased partner’s estate can involve Settlement of the deceased partner’s estate can involve selling the equity to remaining partners or to an outsider, or selling the equity to remaining partners or to an outsider, or it can involve withdrawal of assets.it can involve withdrawal of assets.

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Liquidation of a Partnership

A partnership dissolution requires four steps:

Noncash assets are sold for cash and a gain or loss on liquidations is recorded.

Gain or loss on liquidation is allocated to partners using their income-and-loss ratio.

Liabilities are paid or settled.

Any remaining cash is distributed to partners based on their capital balances.

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No Capital Deficiency No capital deficiency means that all partners have a zero or

credit balance in their capital accounts.

Zayn, Perez and Rasheed agree to dissolve their partnership. The only outstanding liability is an account payable of $20,000. Prior to

dissolution the partnership has the following balance sheet:

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Cash 178,000$ Accounts payable 20,000$ Land 40,000 K. Zayn, Capital 70,000

H. Perez, Capital 66,000 T. Rasheed, Capital 62,000

218,000$ 218,000$

BOARDS'Balance Sheet

At January 15, 2011

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No Capital Deficiency BOARDS’ begins the dissolution process by selling the land for $46,000 cash. The gain on the sale of the land is distributed equally among the

partners. After the sale of the land the company pays the account payable.

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Jan. 15 Cash 46,000 Land 40,000 K. Zayn, Capital 2,000 H. Perez, Capital 2,000 T. Rasheed, Capital 2,000 To record sale of land.

Jan. 15 Accounts payable 20,000 Cash 20,000 To record payment of accounts payable.

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No Capital Deficiency After the sale of land for a gain and the payment of the company’s

accounts payable, BOARDS’ has the following balance sheet:

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Accounts payable -$ Cash 204,000$ K. Zayn, Capital 72,000$

H. Perez, Capital 68,000 T. Rasheed, Capital 64,000

204,000$ 204,000$

BOARDS'Balance Sheet

At January 15, 2011

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Capital Deficiency Capital deficiency Capital deficiency means that at least one partner means that at least one partner has a debit balance in his or her capital account at has a debit balance in his or her capital account at the point of final cash distribution. This can arise from the point of final cash distribution. This can arise from liquidation losses, excessive withdrawals before liquidation losses, excessive withdrawals before liquidation, or recurring losses in prior periods. A liquidation, or recurring losses in prior periods. A partner with a capital deficiency must, if possible, partner with a capital deficiency must, if possible, cover the deficit by paying cash into the partnership.cover the deficit by paying cash into the partnership.

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Capital DeficiencyZayn, Perez, and Rasheed agree to dissolve their partnership.

Prior to the final distribution of cash to the partners, Zayn has a capital balance of $19,000, Perez $8,000, and Rasheed ($3,000). Rasheed owes

the partnership $3,000 and is able to pay the amount.

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Partner Cannot Pay Deficiency

Zayn Perez Rasheed TotalEnding capital balances 19,000$ 8,000$ (3,000)$ 24,000$ Allocation of $3,000 deficiency (1,500) (1,500) 3,000 - Capital balances for dissolution 17,500 6,500 - 24,000

Let’s use the information from our previous example of a capital deficiency and assume partners divide profit and losses equally.

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Global View

Partnership accounting according to U. S. GAAP is similar, but not identical, to that under IFRS.1.Both U. S. GAAP and IFRS include broad and similar guidance for partnership accounting. Partnership organization is similar worldwide, however, different legal systems dictate different implications and motivations for how a partnership is effectively set up.2.The account for partnership admission, withdrawal, and liquidation is likewise similar worldwide. However, different legal systems impact partnership agreements and their implication to the parties.

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Partner Return on Equity

Partner returnon equity

Partner net incomeAverage partner equity=

Total LP I LP II Celtics LPBalance, Beginning of year 85$ 122$ (307)$ 270$ Net income (loss) for year 216 44 61 111 Cash distribution (48) - - (48) Balance, End of year 253$ 166$ (246)$ 333$ Partner return on equity 128% 31% NA 37%

Boston Celtics

216/[(85+253)/2] = 128%

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End of Chapter 12

transactions relating to partners

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