10-1 Learning Objective 6 Make calculations and journal entries to account for changes in partnership ownership.

10-2 Partner’s Admission: Purchase of An Existing Interest The purchase of an interest from one or more of a partnership’s existing partners is a: ■ personal transaction between the incoming partner and the selling partner(s). The only entry required on the partnership’s books is to transfer an amount: ■ from the selling partner’s Capital account. ■ to the new partner’s Capital account. C Interest $ AB Partnershi p AB

10-3 Partner’s Admission: Adding a New Partner Key Objective ■ Achieve equity among the partners +=

10-4 How to Achieve Equity? Example += ➔ How much would C have to contribute? ➔ What factors would you have to consider? Cash$100,000Capital, A$100,000 Land100,000Capital, B100,000 Total Assets$200,000Total Equity$200,000

10-5 How to Achieve Equity? Example Q:What if the land has a current value of $200,000? Assume C contributes $150,000 (FMV of value owned by A and B) for a 1/3 interest in assets, profits, and losses. Q:What if the land is sold the next day for $200,000? Cash$100,000Capital, A$100,000 Land100,000Capital, B100,000 Total Assets$200,000Total Equity$200,000

10-6 Minimizing Inequities The Three Methods ■ The revaluing of assets / goodwill method. ■ The bonus method. ■ The special profit-and-loss sharing provision method. Some methods can still result in inequities if events do not materialize as assumed. ≠

10-7 Minimizing Inequities The Three Methods ■ The revaluing of assets / goodwill method. ■ The bonus method. ■ The special profit-and-loss sharing provision method. Some methods can still result in inequities if events do not materialize as assumed. ≠

10-8 (1) Revaluing of Assets Method Q:What if the land has a current value of $200,000? A:Simply “revalue” the land before admitting C! Q:How do you record C’s contribution? Q:What if the land is sold two years later for $230,000? A:Each gets $10,000 of gain. Cash$100,000Capital, A$150,000 Land200,000Capital, B150,000 Total Assets$300,000Total Equity$300,000 Land 100,000 Capital, A50,000 Capital, B50,000 Cash 150,000 Capital, C150,000

10-9 Q: Given that the land has a current value of $200,000? (2) Bonus Method Q:What if the land is sold two years later for $230,000? A:Each gets $43,333 of gain. Contribution150,000 (-) Implied Capital ( 200, ,000 ) × 1/3116,667 = Bonus33,333 Cash150,000 Capital, A ( 33,333 × 50%)16,667 Capital, B ( 33,333 × 50%)16,667 Capital, C116,667 Journal Entry

10-10 Q: Given that the land has a current value of $200,000? (2) Bonus Method The partners agree to share equally in all future gains or losses on the disposal of the land. However, C’s capital account is decreased up front by the amount of the first $100,000 of gain that he/she will receive ($33,333). This decrease is added to A’s and B’s capital accounts up front. Cash 150,000 Capital, A16,667 Capital, B16,667 Capital, C116,667 Q:What if the land is sold two years later for $230,000? A:Each gets $43,333 of gain.

10-11 (3) Special Profit and Loss Sharing Provision Q: Given that the land has a current value of $200,000? Q:What if the land is sold two years later for $230,000? A:A and B share equally in the first $100,000 of gain and all partners share equally in the additional $30,000 of gain. A and B each get $60,000 and C gets $10,000 of the gain. Cash 150,000 Capital, C150,000 Specify in the new partnership agreement that the land’s current value is $200,000 and that partners A and B share equally (or in some other specified manner) in the first $100,000 of gain when the land is disposed of.

10-12 Cash$250,000Capital, A$150,000 Capital, B 150,000 Land 200,000Capital, C 150,000 Total Assets$450,000Total Equity$450,000 Cash$250,000Capital, A$100,000 Capital, B 100,000 Land 100,000Capital, C 150,000 Total Assets$350,000Total Equity$350,000 Cash$250,000Capital, A$116,667 Capital, B 116,667 Land 100,000Capital, C 116,667 Total Assets$350,000Total Equity$350,000 (1)Revaluing of assets (3)Special P&L Sharing (2) Bonus Gain of $30,000 allocated equally to A, B, & C ($10,000 each) Gain of $130,000: allocate $60,000 to A & B and $10,000 to C Gain of $130,000 allocated equally to A, B, & C ($43,333 each) Summary of the Three Methods: Before Land is Sold for $230,000

10-13 Cash$480,000Capital, A$160,000 Capital, B 160,000 Capital, C 160,000 Total Assets$480,000Total Equity$480,000 Cash$480,000Capital, A$160,000 Capital, B 160,000 Capital, C 160,000 Total Assets$480,000Total Equity$480,000 Cash$480,000Capital, A$160,000 Capital, B 160,000 Capital, C 160,000 Total Assets$480,000Total Equity$480,000 (1)Revaluing of assets (3)Special P&L Sharing (2) Bonus We get the same result under each method! Summary of the Three Methods: After Land is Sold for $230,000

10-14 Comprehensive Exercise

10-15 Comprehensive Exercise

10-16 Comprehensive Exercise

10-17 Comprehensive Exercise

10-18 Comprehensive Exercise

10-19 Practice Quiz Question #5a Betsy contributes $54,000 cash for a 25% interest in the new net assets of the partnership (that has existing equity of $180,000). The old partners capital accounts are not to decrease (i.e., use the Revaluation / Goodwill method). Betsy’s capital account is credited: a.$ 9,000 b.$54,000 c.$58,500 d.$60,000 e.$76,500

10-20 Practice Quiz Question #5a Betsy contributes $54,000 cash for a 25% interest in the new net assets of the partnership (that has existing equity of $180,000). The old partners capital accounts are not to decrease (i.e., use the Revaluation / Goodwill method). Betsy’s capital account is credited: Contribution54,000 (-) Implied Capital ( 180, ,000) × 25%58,500 = Bonus (Negative)- 4,500 Then : Goodwill to new Partner ( 4,500 ÷ 75%)6,000 Cash54,000 Goodwill6,000 Capital, Betsy60,000

10-21 Practice Quiz Question #5b Betsy contributes $54,000 cash for a 25% interest in the new net assets of the partnership (that has existing equity of $180,000). Use the Bonus Method. Betsy’s capital account is credited a.$ 9,000. b.$54,000. c.$58,500. d.$60,000. e.$76,500.

10-22 Practice Quiz Question #5b Betsy contributes $54,000 cash for a 25% interest in the new net assets of the partnership (that has existing equity of $180,000). Use the Bonus Method. Betsy’s capital account is credited Contribution54,000 (-) Implied Capital ( 180, ,000) × 25%58,500 = Bonus (Negative)- 4,500 Cash54,000 Capital, old Partners4,500 Capital, Betsy58,500

10-23 Group Exercise: Goodwill Method Scott and Stephanie are partners with capital balances of $100,000 and $65,000, and they share profits and losses in the ratio of 3:2, respectively. Zoe invests $60,000 cash for a 25% interest in the capital and profits of the new partnership. The partners agree that the implied partnership goodwill is to be recorded simultaneously with the admission of Zoe. REQUIRED 1.Calculate the firm’s total implied goodwill. 2.Prepare the entry or entries to record the admission of Zoe.

10-24 Group Exercise: Goodwill Method Scott and Stephanie are partners with capital balances of $100,000 and $65,000, and they share profits and losses in the ratio of 3:2, respectively. Zoe invests $60,000 cash for a 25% interest in the capital and profits of the new partnership. The partners agree that the implied partnership goodwill is to be recorded simultaneously with the admission of Zoe. REQUIRED 1.Calculate the firm’s total implied goodwill. Contribution60,000 (-) Implied Capital ( 165, ,000) × 25%56,250 = Bonus (Negative)3,750 Then : Goodwill = ( 3,750 ÷ 25%)15,000

10-25 Group Exercise: Goodwill Method Solution Entry to record Goodwill Entry to record Admission Goodwill15,000 Capital, Scott (15,000 × 3/5)9,000 Capital, Steph. (15,000 × 2/5)6,000 Cash60,000 Capital, Zoe60,000

10-26 Learning Objective 7 Withdrawing from Partnership

10-27 Withdrawing from a Partnership A partner that withdraws from a partnership is still responsible for the following items that exist at the time of the withdrawal: ■ all partnership obligations, and ■ all contingent liabilities, Only creditors can expressly release a partner from this responsibility.

10-28 Practice Quiz Question #6 Upon withdrawal from a partnership, Cliff received $14,000 cash in excess of his capital balance. Cliff’s share of profits and losses was 20%. Partnership land was undervalued by $50,000. The total partnership goodwill is a.$ 4,000. b.$20,000. c.$24,000 d.$70,000.

10-29 Solution Excess value of land$50,000 x 20% Cliff’s share$10,000 Total excess payment$14,000 − Share of land excess 10,000 Cliff’s share of goodwill$ 4,000 ÷ 20% Total Goodwill$20,000

10-30 Practice Quiz Question #6 Solution Upon withdrawal from a partnership, Cliff received $14,000 cash in excess of his capital balance. Cliff’s share of profits and losses was 20%. Partnership land was undervalued by $50,000. The total partnership goodwill is a.$ 4,000. b.$20,000. (5 x [$14,000 - {20% x $50,000}]) c.$24,000 d.$70,000.

10-31 Group Exercise: Retirement The 6/30/X8 balance sheet of the partnership of Sandy, Rees, and Raymond as follows. The partners share profits and losses in the ratio of 2:2:6, respectively. Assets at cost $145,000 Sandy, loan 9,000 Other liabilities 17,000 Capital, Sandy 20,000 Capital, Rees 37,000 Capital, Raymond 62,000 Sandy retires from the partnership. By mutual agreement, the assets are to be adjusted to their fair value of $150,000 at 6/30/X8. Rees and Raymond agree that the partnership will pay Sandy $45,000 cash for her partnership interest, exclusive of her loan, which is to be paid in full. No goodwill is to be recorded. REQUIRED 1.Prepare the entry to record the revaluation of assets to fair value. 2.Prepare the entry to record Sandy’s retirement. 3.What is the implicit total goodwill for the partnership?

10-32 Group Exercise Solution PART 1 Assets5,000 Capital, Sandy1,000 Capital, Rees1,000 Capital, Raymond3,000 PART 2 Capital, Sandy21,000 Capital, Rees 6,000 Capital, Raymond18,000 Cash45,000 PART 3 To revalue assets to their current value. To record the withdrawal of Sandy. Sandy received a bonus of $24,000, which was equal to her share of the goodwill. Because Sandy’s profit and loss sharing ratio was 20%, the total goodwill must have been $120,000 ($24,000 ÷ 20%).

10-33 Conclusion The End