Admission and Withdrawal of Partners Journal entries and dynamics of admitting a partner partner withdrawal

Partnership Dynamics Partnership 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.

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?

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.

Rasheed invests $22,000 for a 22% interest in the partnership A New Partner is Admitted The new partner’s interest in the partnership equals amount invested. Rasheed invests $22,000 for a 22% interest in the partnership

Rasheed invests $42,000 for a 25% interest in the partnership A New Partner is Admitted The new partner’s interest in the partnership exceeds 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.

Rasheed invests $18,000 for a 25% interest in the partnership A New Partner is Admitted The new partner’s interest in the partnership is 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.

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.

Withdrawing Partner Receives an Amount Equal to Capital Balance

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.

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.

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.