Admission and Withdrawal of a partner

2) purchase of interest of old partners. In this case the capital of the partnership will not be changed since the transaction is a personal transaction between the partners. And the amount paid by the new partner will be distributed between the old partners outside the partnership. (However, sometimes the partners agree to revaluate the assets before the admission).

Example A and B are partners in a general partnership Example A and B are partners in a general partnership. They share the profit and losses on a basis of 2:3. their capital is 100,000 and 200000 respectively. Tamer is a new partner to be admitted to the partnership for 25% of the partner A’s capital and 20% of the partner B’s capital and Tamer paid to them 65000 cash. Required: Prepare the journal entry required to record the admission of Tamer .

Solution from partner A= 100000 X 25% = 25000 The capital of the new partner( Tamer): from partner A= 100000 X 25% = 25000 from partner A= 200000 X 20% = 40000 65000 SO, we will decrease the capital of A and B and increase the capital of the new partner and the entry will be as follows: Dr Cr Capital, A 25000 Capital, B 40000 Capital, Tamer 65000

Withdrawal of a partner In this case, it is important to know that we have to do the following steps : 1) Determining the capital of the partner at the time of withdrawal. It means that any profits or losses, loans, drawings should be closed in the capital account of the partner. 2) Comparing between the balance of his capital and the amount paid to the partner. The difference (excess payment or underpayment) could be treated as: 1- Goodwill 2- Bonus

Example (1) A, B and Nour are partners in a general partnership. They share net income on a basis of 2:1:4 respectively. If you know that: 1) The partner Nour withdrew from the partnership on 31 Dec. 2011 for 30,000 in cash. 2) The capital of Nour at the date of withdrawing was 30000. Required: Prepare the journal entry to record the withdrawal of Nour.

Solution Firstly ,we compare between the capital of withdrawing partner Nour and the paid amount to him as follows: 1) The capital of withdrawing partner Nour = 30000. 2) The paid amount = 30000. There is no difference between the capital of Nour and the paid amount ,so there is no problem and the entry is: Dr Cr Capital, Nour 30000 Cash

Partner Nour withdrew from the partnership for 36,000 in cash. Example (2) The same facts in ex. (1) but Partner Nour withdrew from the partnership for 36,000 in cash. Required : Prepare the journal entry to record the withdrawal using the bonus method.

Solution 1)The capital of withdrawing partner Nour = 30000. 2) The paid amount = 36000. The paid amount to the partner (36000) is more than his capital (30000) , so the difference (6000) is a bonus to Nour and will be deducted from the capital of remaining partners (A& B) by the ratio between them as follows: A B Total 2 1 = 3 The share of ( A) = 6000 * ( 2/3) = 4000 The share of ( B) = 6000 * ( 1/3) = 2000 So, the entry is: Capital, Nour 30000 Capital, A 4000 Capital, B 2000 Cash 36000

Partner Nour withdrew from the partnership for 36,000 in cash. Example (3) The same facts in ex. (1) but Partner Nour withdrew from the partnership for 36,000 in cash. Required : Prepare the journal entry to record the withdrawal using the goodwill method.

Solution 1)The capital of withdrawing partner Nour = 30000. 2) The paid amount = 36000. The paid amount to the partner (36000) is more than his capital (30000) , so the difference (6000) is a goodwill to Nour and will be recorded in the entry . So, the entry is: Capital, Nour 30000 Goodwill 6000 Cash 36000

Partner Nour withdrew from the partnership for 27,000 in cash. Example (4) The same facts in ex. (1) but Partner Nour withdrew from the partnership for 27,000 in cash. Required : Prepare the journal entry to record the withdrawal using the bonus method.

Solution 1)The capital of withdrawing partner Nour = 30000. 2) The paid amount = 27000. The paid amount to the partner (27000) is less than his capital (30000) , so the difference (3000) is a bonus to remaining partners (A&B) and will be added to their capital by the ratio between them as follows: A B Total 2 1 = 3 The share of ( A) = 3000 * ( 2/3) = 2000 The share of ( B) = 3000 * ( 1/3) = 1000 So, the entry is: Capital, Nour 30000 Capital, A 2000 Capital, B 1000 Cash 27000

Example (5) The same facts in ex. (1) but Partner Nour withdrew from the partnership for 27,000 in cash. If you know that the partnership has a goodwill account with balance 50000. Required : Prepare the journal entry to record the withdrawal using the goodwill method.

Solution 1)The capital of withdrawing partner Nour = 30000. 2) The paid amount = 27000. The paid amount to the partner (27000) is less than his capital (30000) , so the difference (3000) is will be deducted from the goodwill account and will be recorded in the entry . So, the entry is: Capital, Nour 30000 Goodwill 3000 Cash 27000