Accounting for Partnerships - Section No PDF

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Accounting For Partnerships – Section No.8 The Withdrawal or Retirement of a Partner Consider the following notes while solving withdrawal cases: 1. Before recording the withdrawal, record any required revaluations or adjustments. 2. Any revaluation will increase or decrease all partners’ capital according to their profit or loss ratio. 3. There are two ways to record the withdrawal

Selling Way Solve under the selling was if the word “sell is mentioned”

Payment Way Solved under the payment way if any of the following is mentioned:  “the partnership paid …”  “The retiring partner received a check from the partnership”  The retiring partner received …. From the partnership

Under the selling way the entry will be as follows:  Retiring Partner, Capital Payment (Debit)  Continuing and/or new Partner, Capital (Credit)

Under the Payment way the entry will be as follows:  Retiring Partner, Capital Payment (Debit)  Payment (Credit)

4. Under the Selling way, ignore any payment to the retiring partner. 5. Under the Payment way, the payment may take the form of Cash, other asset, or a liability.

6. When solving under the Payment way, the payment should be compared with the capital of the retiring partner. There are three cases:

Payment = Capital of retiring Partner In this Case, No bonus and No goodwill

Payment < Capital of retiring Partner In this Case, there will be:  A bonus to the continuing partner.  Partial goodwill reduction.  Full goodwill reduction.

Payment > Capital of retiring Partner In this Case, there will be:  A bonus to the retiring partner.  Partial goodwill recognition.  Full goodwill recognition

7. Under the bonus method, the amount of bonus (the difference between Payment and capital) is allocated according to the relative profit or loss ratio of the continuing partners. (relative profit or loss ratio is the ratio of profit or loss after removing the ratio of the retiring partner. 8. Under the partial goodwill method, the difference between payment and capital is the amount of the goodwill. 9. Under the full goodwill method, the goodwill is calculated as follows: The difference between capital and Payment ÷ profit or loss ratio of the retiring partner. 10. Under the full goodwill method, the goodwill is allocated to all partner (including the retiring partner) according to their profit or loss ratio.

Question Awad, Aly and Amr share the net income of their partnership, i.e. the “3-A Co.”, in the ratio 1:1:3 respectively. The balance sheet of the “3-A Co.” prepared as May 30,2009, before adjusting and revaluating the tangible noncash assets and before considering some specific proposals to record the withdrawal of Awad on that date, included the following balances in LE: Cash 46500, Tangible Noncash Assets 231000, Goodwill (unamortized) 7500, Accounts Payable 135000, Awad Loan 15000, Awad Capital 27000, Aly Capital 27000 and Amr Capital 81000. The three partners agreed to adjust the tangible noncash assets to their fair value of LE246000 and to pay in full from partnership’s cash Awad’s loan before his retirement. The partners are now negotiating specific proposals to record the withdrawal of Awad.

Required: Draft entries to record the revaluation of the tangible noncash assets to their fair value and to record the payment of Awad’s loan, then draft entries to record the withdrawal of Awad under each of the following independently assumed proposals. If any proposal allows the use of the bonus, the partial goodwill and the full goodwill methods, draft the entry or entries related to the use of each method to record this withdrawal. First Proposal: Awad is to sell his capital interest as 60% to Aly and 40% to Amr for LE18375 and LE13125 respectively where these amounts are to be paid outside the “3-A Co.” Second Proposal: Awad is to sell his capital interest to his brother Ahmed, who is accepted in the firm. Third proposal: The “3-A Co.” is to pay Awad LE30,000 cash for his interest.

Fourth proposal: Awad is to receive enough cash from the “3-A Co.” without introducing any further revaluations and/or adjustments. Fifth Proposal: Awad is to receive from the “3-A Co.” LE31500 cash. Sixth Proposal: The partnership pays Awad LE31500 cash for his interest without recognizing any additional goodwill for the continuing partners. Seventh Proposal: A payment of LE31500 cash from the partnership to Awad for his interest without recognizing any additional goodwill upon the withdrawal of Awad. Eighth Proposal: Awad is to receive a check for LE31500 from the company for his interest after recognizing additional goodwill for all partners including Awad. Ninth Proposal: The partnership pays Awad LE31500 cash for his interest after purchasing an additional goodwill from Awad before his retirement. Tenth Proposal: Awad is to receive 31500 cash without decreasing capitals of continuing partners. Eleventh Proposal: The “3-A Co.” is to pay Awad LE28500 cash. Twelfth Proposal: A Payment of LE28500 from the partnership to Awad for his interest without any reductions in previously recorded goodwill. Thirteenth Proposal: Awad is to receive a check for LE28500 from the company for his interest without allowing any bonuses to the continuing partners. Fourteenth Proposal: The partnership pays Awad LE28500 cash for his interest after writing off (reducing) the full unamortized amount of the previously recorded goodwill.

Solution Journal entries to record the revaluation of the tangible noncash assets to their fair value and to record the payment of Awad’s loan before recording Awad’s withdrawal: 2009 Tangible Noncash Assets May 30 Awad, Capital (15000 × 1/5) Aly, Capital (15000 × 1/5) Amr, Capital (15000 × 3/5) (to record the revaluation of tangible noncash assets) 30 Awad, Loan Cash (to record payment of Awad’s loan)

15000 3000 3000 9000

15000 15000

Note: Any revaluation will increase or decrease all partners’ capital according to their profit or loss ratio. Before Solving the journal entries of the withdrawal, make sure that you have the following:  Profit or loss ratio: 1:1:3  Capital of the partners (after revaluations): Awad = 27000 + 3000 = 30000 Aly = 27000 + 3000 = 30000 Amr = 81000 + 9000 = 90000  Relative profit or loss ratio of the continuing partners: 1:3

Journal entries to record the withdrawal of Awad under each of the independently assumed proposals: First Proposal 2009 Awad, Capital May 30 Aly, Capital (30000 × 60%) Amr, Capital (30000 × 40%) (to record the withdrawal of Awad)

30000 18000 12000

Note: Ignore any payments under the selling way. Second Proposal 2009 Awad, Capital May 30 Ahmed, Capital (to record the withdrawal of Awad)

30000 30000

Third Proposal Payment: 30000 = 30000 Awad, Capital Therefore, No bonus, No goodwill 2009 Awad, Capital May 30 Cash (to record the withdrawal of Awad)

30000 30000

Fourth Proposal The same as the third proposal because the retiring partner will receive enough cash without recognizing any bonus or goodwill which means that “payment 30000 = 30000 Awad, Capital” Fifth Proposal Payment: 31500 > 30000 Awad, Capital ∴ Excess of 1500 Therfore:  A bonus of 1500 is allowed to the retiring partner Awad.  OR: a partial goodwill of 1500 is to be recognized (or purchased) for Awad.  OR: a Full goodwill is recognized for all partners including retiring partner Awad. Under the Bonus Method: 2009 Awad, Capital 30000 May 30 Aly, Capital (1500 × 1/4) 375 Amr, Capital (1500 × 3/4) 1125 Cash 31500 (to record the withdrawal of Awad under the bonus method) Note: under the bonus method, the difference between payment and retiring partner’s capital is allocated to continuing partners according to their relative profit or loss ratio. Under the Partial Goodwill Method: 2009 Awad, Capital May 30 Goodwill (partial) Cash (to record the withdrawal of Awad under the partial goodwill method)

30000 1500 31500

Under the Full Goodwill Method: Under the full goodwill method, the amount of goodwill (full) is calculated as follows: Difference between payment and capital of the retiring partner ÷ profit or loss ratio of the retiring partner Goodwill (full) = 1500 ÷ 1/5 = 7500 2009 Goodwill (full) May 30 Awad, Capital (7500 × 1/5) Aly, Capital (7500 × 1/5) Amr, Capital (7500 × 3/5) (to recognize full goodwill) 30 Awad, Capital Cash (to record the retirement of Awad)

7500 1500 1500 4500 31500 31500

Notes:  Under the full goodwill method, the amount of goodwill is allocated to all partners (including the retiring partner) according to their profit or loss ratio.  Under the full goodwill method, the second entry is made by the amount of payment.

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Sixth Proposal Solve under bonus and partial goodwill methods as in fifth proposal. Do not use the full goodwill method as it results in recognizing goodwill for the continuing and the required is to solve without recognizing goodwill for continuing partners.

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Seventh Proposal Solve under bonus method as in fifth proposal. Do not use the partial goodwill and full goodwill methods as it is required is to solve without recognizing any goodwill.

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Eighth Proposal Solve under the full goodwill method as in fifth proposal because it is the only method that results in recognizing additional goodwill for all partners including Awad. Do not use the bonus and partial goodwill methods.

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Ninth Proposal Solve under the partial goodwill method as in fifth proposal because partial goodwill recognition means that the partnership purchases a goodwill from the retiring partner. Do not use the bonus and full goodwill methods.

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Tenth Proposal Solve under the partial and full goodwill methods as in fifth proposal. Do not use the bonus method as it results in decreasing the capital of continuing partners.

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Eleventh Proposal Payment: 28500 < 30000 Awad, Capital ∴ reduction of 1500 Therfore:  A bonus of 1500 is allowed to the continuing partners.  OR: a reduction of a partial goodwill of 1500.  OR: a reduction of a full goodwill related to all partners including the retiring partner Awad. Under the Bonus Method: 2009 Awad, Capital May 30 Aly, Capital (1500 × 1/4) Amr, Capital (1500 × 3/4) Cash (to record the withdrawal of Awad under the bonus method) Under the Partial Goodwill Method: 2009 Awad, Capital May 30 Goodwill (partial) Cash (to record the withdrawal of Awad under the partial goodwill method)

30000 375 1125 28500

30000 1500 28500

Important Note: In case of partial goodwill reduction and full goodwill reduction you have to compare between the amount of goodwill given in the case and the amount of goodwill that will be reduced:  If the amount of goodwill given in the balance sheet is enough, therefore we will prepare the entry.  If the amount of goodwill given in the balance sheet is not enough or there is no goodwill, therefore no entry will be prepared In this case the amount of goodwill given is 7500 and it is enough to reduce from it 1500 of the partial goodwill. For that reason, the entry is prepared.

Under the Full Goodwill Method: Goodwill (full) = 1500 ÷ 1/5 = 7500 2009 Awad, Capital (7500 × 1/5) May 30 Aly, Capital (7500 × 1/5) Amr, Capital (7500 × 3/5) Goodwill (full) (to recognize full goodwill) 30 Awad, Capital Cash (to record the retirement of Awad)

1500 1500 4500 7500 28500 28500

Note: As the goodwill given in this case which is enough to reduce from it the amount of full goodwill (7500). For this reason, the entry is prepared.

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Twelfth Proposal Solve under bonus method as in eleventh proposal. Do not use the partial goodwill and full goodwill methods as these methods will result in reductions in the amount of goodwill. Thirteenth Proposal Solve under the partial and full goodwill methods as in eleventh proposal. Do not use the bonus method.

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Fourteenth Proposal Solve under the full goodwill methods as in eleventh proposal. Do not use the bonus and partial goodwill methods.

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