{"id":1975,"date":"2016-07-29T22:17:23","date_gmt":"2016-07-29T22:17:23","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/finaccounting\/?post_type=chapter&p=1975"},"modified":"2016-07-29T22:17:23","modified_gmt":"2016-07-29T22:17:23","slug":"changes-to-the-partners","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/changes-to-the-partners\/","title":{"raw":"Changes to the Partners","rendered":"Changes to the Partners"},"content":{"raw":"

Partner Withdrawal<\/h3>\r\nIn your partnership, you may decide to add new partners.\u00a0 Or, you may decide you or one of your partners need to leave the partnership.\u00a0 Worst case scenario is the death of one of your partners.\u00a0 What do you do?\r\n\r\nFor withdrawal of a partnership, either from death or choice, there are a\u00a0several scenarios:\r\n
    \r\n\t
  1. The individual partners pay, with their own cash and not the partnership cash, the leaving partner for a share of the leaving partner's capital account.<\/li>\r\n\t
  2. The partnership pays the leaving partner for the value of his or her capital account + a cash bonus.<\/li>\r\n\t
  3. The leaving partner pays a bonus to the remaining partners by not taking the full amount of the his or her capital balance.\u00a0 Any remaining balance would be allocated between the remaining partners.<\/li>\r\n<\/ol>\r\nThis video will demonstrate the process for both scenarios and the journal entries for the first scenario.\r\n\r\nhttps:\/\/youtu.be\/I92UrTGT6gQ\r\n\r\nWhen a bonus is paid to the retiring partner using partnership cash, the capital account of the retiring partner is debited and any bonus amount is allocated to the remaining partner accounts according to their agreed upon profit and loss sharing percentages.\r\n\r\nIn the video, a partner was leaving and received a $2,000 bonus or $12,000 total cash from the partnership since his capital balance was $10,000 (let's call him S. Leavy).\u00a0 Two partners remain (we will call them I. Staying and M. Too) and share profits equally.\u00a0 The journal entry to withdrawal of S. Leavy from the partnership is:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    S. Leavy, Capital<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    I. Staying, Capital ($2000 bonus \/ 2)<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    M. Too, Capital ($2000 bonus \/ 2)<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 12,000<\/td>\r\n<\/tr>\r\n
    To record bonus paid to retiring partner (S.Leavy)<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe last scenario in the video, a partner was leaving but decided not to take the full amount of his capital balance.\u00a0 S. Leavy had a capital balance of $12,000 and wants to leave the partnership by receiving $8,000 cash.\u00a0 Two partners remain (we will call them I. Staying and M. Too) and share profits equally.\u00a0 The journal entry to withdrawal of S. Leavy from the partnership is:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    S. Leavy, Capital<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 12,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Cash<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 8,000<\/td>\r\n<\/tr>\r\n
    \u00a0\u00a0 \u00a0 I. Staying, Capital ($4000 bonus \/ 2)<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 2,000<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0\u00a0 M. Too, Capital ($4000 bonus \/ 2)<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 2,000<\/td>\r\n<\/tr>\r\n
    To record bonus paid by retiring partner (S.Leavy)<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

    Partner Admission<\/h3>\r\nA partner can be added to an existing partnership in four ways, including:\r\n
      \r\n\t
    1. New partner can purchase part of the interest of another partner.<\/li>\r\n\t
    2. New partner can invest cash or other assets in the business.<\/li>\r\n\t
    3. New partner can pay a bonus to existing partners by paying more than interest percentage received.<\/li>\r\n\t
    4. New partner can receive a bonus from partnership by paying less than the interest percentage received.<\/li>\r\n<\/ol>\r\nWe will look at each one individually including journal entries and effect on owner's capital.\r\n\r\n1.\u00a0 New partner can purchase part of the interest of another partner.\r\n\r\nSam Sun and Roni Rain are partners.\u00a0 Sam has a capital balance of $100,000 and Roni $90,000.\u00a0 Chloe Cloud wants to join the partnership.\u00a0 Roni Rain has agreed to sell\u00a0Chloe 1\/3 of her interest in the partnership for $40,000 cash.\u00a0 The cash will be paid directly to Roni and not to the partnership.\u00a0 This will not change total partnership equity but instead 1\/3 of Roni Rain's capital balance will be transferred to Chloe Cloud in the following entry:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      <\/td>\r\n\u00a0Debit<\/td>\r\n\u00a0Credit<\/td>\r\n<\/tr>\r\n
      R. Rain, Capital<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 30,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 C. Cloud, Capital<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 30,000<\/td>\r\n<\/tr>\r\n
      To record admittance of C. Cloud.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nTotal partnership equity remains at $190,000 with Sam Sun having $100,000, Roni Rain $60,000 (90,000 original - 30,000 to Chloe), Chloe Cloud $30,000.\r\n\r\n2.\u00a0 New partner can invest cash or other assets in the business.\r\n\r\nIn this scenario, the new partner will provide cash or other assets directly to the partnership to become an owner.\u00a0 Since the partnership is receiving the cash or other assets, we will record those at fair market values and there will be no change to the existing partners.\r\n\r\nChloe Cloud invests $50,000 cash to be come a new partner with Sam Sun and Roni Rain.\u00a0 Since the cash is received by the partnership, we will record this and give Chloe cloud her capital balance.\u00a0 The entry to record this would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      <\/td>\r\n\u00a0Debit<\/td>\r\n\u00a0Credit<\/td>\r\n<\/tr>\r\n
      Cash<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 50,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 C. Cloud, Capital<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 50,000<\/td>\r\n<\/tr>\r\n
      To record admittance of C. Cloud for cash.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nAssuming the same beginning facts as example 1, the new partnership equity would be $240,000\u00a0 (Sam Sun $100,000; Roni Rain $90,000; Chloe Cloud $50,000).\r\n\r\n3.\u00a0 New partner can pay a bonus to existing partners by paying more than interest percentage received.\u00a0 This occurs when the partnership has a current market value greater than the current partner's equity.\r\n\r\nAssume Sun and Rain partnership equity is $190,000 total.\u00a0 Chloe Cloud will pay the partnership $85,000 cash to get a 30% interest in the business.\u00a0 First, we need to calculate the new value of the partnership.\u00a0 The new value will be existing capital $190,000 + $85,000 new partner cash for $275,000.\u00a0 Second, we calculate the value of a 30% interest by multiplying new capital total by 30 %\u00a0 (275,000 x 30% = $82,500).\u00a0 Third, we compare the cash paid by new partner $85,000 - to value of 30% interest $82,500 to get the bonus to the other partners of $2,500.\u00a0 Finally, we will divide the bonus between the partners using profit and loss sharing agreements but for ease let us assume it is divided equally\u00a0 ($2,500 \/ 2 partners = $1,250 each).\u00a0 We will increase each of the old partner's capital accounts by the bonus amount.\u00a0 The journal entry would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      <\/td>\r\n\u00a0Debit<\/td>\r\n\u00a0Credit<\/td>\r\n<\/tr>\r\n
      Cash (paid by Cloud)<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 85,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 C. Cloud, Capital\u00a0 (30% interest)<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 82,500<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0\u00a0 S. Sun, Capital ($2,500 bonus \/ 2)<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,250<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0\u00a0 R. Rain, Capital ($2,500 bonus \/ 2)<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,250<\/td>\r\n<\/tr>\r\n
      To record admission and bonus to C. Cloud<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe new partnership equity would be $275,000 with Cloud added and Sun and Rain will have increased their capital by $1,250 each.\u00a0 Capital balances are:\u00a0 Sun $101,250; Rain $91,250; and Cloud $82,500.\r\n\r\n4.\u00a0\u00a0New partner can receive a bonus from partnership by paying less than the interest percentage received. This can occur when the new partner has a special skill or expertise needed by the partnership or the partnership just needs the cash!\r\n\r\nAssume Sun and Rain partnership equity is $190,000 total.\u00a0 Chloe Cloud will pay the partnership $42,000 cash to get a 20% interest in the business.\u00a0 First, we need to calculate the new value of the partnership.\u00a0 The new value will be existing capital $190,000 + $42,000 new partner cash for $232,000.\u00a0 Second, we calculate the value of a 20% interest by multiplying new capital total by 20 %\u00a0 (232,000 x 20% = $46,400).\u00a0 Third, we compare the\u00a0value of the 20% interest $46,400 - \u00a0cash paid by new partner $42,000to get the bonus to the new partner of $4,400.\u00a0 Finally, we will divide the bonus between the partners using profit and loss sharing agreements but for ease let us assume it is divided equally\u00a0 ($4,400\/ 2 partners = $2,200 each).\u00a0 This bonus would reduce each of the old partner's capital balances.\u00a0 The journal entry would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      <\/td>\r\n\u00a0Debit<\/td>\r\n\u00a0Credit<\/td>\r\n<\/tr>\r\n
      Cash (paid by Cloud)<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 42,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      S. Sun, Capital\u00a0 ($4,400 \/ 2)<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 2,200<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      R. Rain, Capital ($4,400 \/ 2)<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 2,200<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 C. Cloud, Capital<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 82,500<\/td>\r\n<\/tr>\r\n
      To record admission and bonus to C. Cloud<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe new partnership equity would be $232,000 with Cloud added but Sun and Rain decreased their capital by $2,200 each.\u00a0 Capital balances are:\u00a0 Sun $97,800; Rain $87,800; and Cloud $46,400.\r\n\r\n<\/div>\r\nhttp:\/\/www.openassessments.com\/assessments\/1207","rendered":"

      Partner Withdrawal<\/h3>\n

      In your partnership, you may decide to add new partners.\u00a0 Or, you may decide you or one of your partners need to leave the partnership.\u00a0 Worst case scenario is the death of one of your partners.\u00a0 What do you do?<\/p>\n

      For withdrawal of a partnership, either from death or choice, there are a\u00a0several scenarios:<\/p>\n

        \n
      1. The individual partners pay, with their own cash and not the partnership cash, the leaving partner for a share of the leaving partner’s capital account.<\/li>\n
      2. The partnership pays the leaving partner for the value of his or her capital account + a cash bonus.<\/li>\n
      3. The leaving partner pays a bonus to the remaining partners by not taking the full amount of the his or her capital balance.\u00a0 Any remaining balance would be allocated between the remaining partners.<\/li>\n<\/ol>\n

        This video will demonstrate the process for both scenarios and the journal entries for the first scenario.<\/p>\n