Accounting for Partnerships - Section No.6 PDF

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Accounting for Partnerships – Section No. 6 Admission of the new partner   

Admission means adding a new partner to an existing partnership. The admission of a new partnership transfers the old partnership to become a new partnership. Before recording the admission, record all the agreed upon corrections, adjustments and revaluations of assets and liabilities of the old partnership. These corrections are to be made directly in relation to the old partners’ capital accounts in accordance with their old profit/loss ratio.

Consider the following notes when solving admission cases: 1. Solve under the purchasing way if the word purchase is mentioned. 2. Under the purchasing way, don't record any asset paid by the new partner. 3. Solve under the investment way if the word invest or contribute is mentioned. 4. If the difference in problem test is negative, a bonus or goodwill will be given to old partners. 5. If the difference is problem test is positive, a bonus or goodwill will be given to the new partner. 6. If the difference in problem test is zero, no bonuses or goodwill is to be given to any partner. 7. Goodwill or bonus is to be allocated according to old partners' profit/loss ratio. 8. Use the bonus method in the following cases:  If he statement "without recognizing any goodwill" is mentioned.  If total capital after admission = total capital in problem test. 9. Use the goodwill method in the following cases:  If the statement "…recognizing a goodwill" is mentioned.  If the new partner is to receive capital interest equal to his/her contributions (investments).  If old partners will not decrease their capital balances.  If total capital after admission ≠ total capital in problem test. 10. Goodwill to the old partners =difference in problem test ÷ ratio of capital interest of the new partner 11. Goodwill to the new partner = difference in problem test ÷ ratio of capital interest of old partners together

Problem test is to calculated as follows: Capital interest to be acquired by new partner Percentage or ratio of capital interest of the new partner (capital balances of old partners + investments by the new partner)

XX (XX)

Less: Investments by the new partner

XX

Difference

1

Question (On Admission): "Badr and Bakr" admit Amr to their partnership forming a new partnership at the start of the year 2004. Just before the admission of Amr, the capitals of Badr and Bakr after introducing revaluation of tangible fixed assets were LE 3000 and LE 1000 respectively. The two partners were sharing net income in a ratio bases on their capital balances at the end of the period. Required: Record the admission of Amr under each of the following independent conditions: (A) Amr Purchased 100% of Badr's capital interest paying him personally LE 6000 cash where a new partnership is formed under the name "Bakr & Amr Co." (B) Amr paid in the partnership LE 2000 cash interest in the new partnership "BBA Co." and insisted to have a capital interest equal to his cash investment and to have a one-third capital interest in the "BBA Co." (C) Amr invested LE 2000 cash equal to his interest (D) Amr invested LE 2000 cash for a one-quarter interest. Total capital after admission is to be LE 6000. (E) Amr invested LE 2000 cash for a one-quarter interest without recognizing any goodwill. (F) Amr invested LE 2000 cash for a 25% interest equal to his cash contribution. (G) Amr invested LE 2000 cash for a 25% interest recognizing a goodwill. (H) Amr invested an equipment valued at LE 2000. Amr is to acquire a 40% interest without recognizing any goodwill. (I) Amr invested an equipment valued at LE 2000. Amr is to acquire a 40% interest. Total capital after admission is to be LE 6000. (J) Amr invested LE 2000 cash for a 40% interest without decreasing capitals of old partners. (K) Amr invested LE 2000 cash for a 40% recognizing a goodwill.

Solution (A) The required entry to record the admission of Amr who purchased 100% of Badr capital interest(LE): 2004 Jan.1

Badr, Capital Amr, capital (To record the admission of Amr)

3000 3000

(B) The required entry to record the admission of Amr who invested LE 2000 cash for 1/3 capital interest (LE): Problem test: Capital interest to be acquired by Amr = 1/3 (3000 + 1000 + 2000) = 1/3 × 6000 = 2000 Less: investments by Amr (2000) Difference zero Therefore, no bonuses or goodwill will be given to any partner. 2004 Jan.1

Cash

2000

Amr, capital (To record the admission of Amr)

(C) The same as "B".

2

2000

(D) The required entry to record the admission of Amr who invested LE 2000 cash for 1/4 capital interest (LE): Problem test: Capital interest to be acquired by Amr = 1/4 (3000 + 1000 + 2000) = 1/4 × 6000 Less: investments by Amr Difference

= 1500 (2000) (500)

Therefore, a bonus is to be given to old partners because the total capital after admission (given in the case 6000) is the same as total capital in problem test. 2004 Jan.1

Cash Badr, Capital (500 × 3/4) Bakr, Capital (500 × 1/4) Amr, capital (To record the admission of Amr under the bonus method)

2000 375 125 1500

(E) The same as "D". (F) The required entry to record the admission of Amr who invested LE 2000 cash for 25% capital interest (LE): Problem test: Capital interest to be acquired by Amr = 25% (3000 + 1000 + 2000) = 25% × 6000 Less: investments by Amr Difference

= 1500 (2000) (500)

Therefore a goodwill is to be given to old partners. Goodwill recognized for old partners = 500 ÷ 25% = 2000 2004 Jan.1

Goodwill Badr, Capital (2000 × 3/4) Bakr, Capital (2000 × 1/4) (to record goodwill recognized for old partners)

2000

Cash

2000

1500 500

Jan.1 Amr, Capital (to record cash invested by Amr)

3

2000

(G) The same as "F". (H) The required entry to record the admission of Amr who invested Equipment valued at LE 2000 for 40% capital interest (LE): Problem test: Capital interest to be acquired by Amr = 40% (3000 + 1000 + 2000) = 40% × 6000 Less: investments by Amr Difference

= 2400 (2000) 400

Therefore, A bonus will be given to the new partner Amr. 2004 Jan.1

Equipment Badr, Capital (400 × 3/4) Bakr, Capital (400 × 1/4) Amr, capital (To record the admission of Amr under the bonus method)

2000 300 100 2400

(I) The same as "H". (J) The required entry to record the admission of Amr who invested LE 2000 cash for 40% capital interest (LE): Problem test: Capital interest to be acquired by Amr = 40% (3000 + 1000 + 2000) = 40% × 6000 Less: investments by Amr Difference

= 2400 (2000) 400

Therefore, goodwill will be recognized for the new partner Amr. Goodwill recognized for the new partner Amr = 400 ÷ 60% = 666.67 2004 Jan.1

Goodwill

666.67

Amr, Capital (to record goodwill recognized for the new partner Amr) Jan.1

Cash

666.67

2000

Amr, Capital (to record cash invested by Amr) (K) The same as "J".

4

2000...