10-1 learning objective 6 make calculations and journal entries to account for changes in...
TRANSCRIPT
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 $
ABPartnershi
p
A B
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 $100,000 Capital, A $100,000
Land 100,000 Capital, B 100,000
Total Assets $200,000 Total 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 $100,000 Capital, A $100,000
Land 100,000 Capital, B 100,000
Total Assets $200,000 Total 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 $100,000 Capital, A $150,000
Land 200,000 Capital, B 150,000
Total Assets $300,000 Total Equity $300,000
Land 100,000Capital, A 50,000Capital, B 50,000
Cash 150,000Capital, C 150,000
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.
Contribution 150,000
(-) Implied Capital ( 200,000 + 150,000 ) × 1/3 116,667
= Bonus 33,333
Cash 150,000
Capital, A ( 33,333 × 50%) 16,667
Capital, B ( 33,333 × 50%) 16,667
Capital, C 116,667
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 150,000Capital, A 16,667Capital, B 16,667Capital, C 116,667
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 150,000Capital, C 150,000
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 $250,000 Capital, A $150,000Capital, B 150,000
Land 200,000 Capital, C 150,000Total Assets $450,000 Total Equity $450,000
Cash $250,000 Capital, A $100,000Capital, B 100,000
Land 100,000 Capital, C 150,000Total Assets $350,000 Total Equity $350,000
Cash $250,000 Capital, A $116,667Capital, B 116,667
Land 100,000 Capital, C 116,667Total Assets $350,000 Total Equity $350,000
(1) Revaluingof assets
(3) SpecialP&LSharing
(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 $480,000 Capital, A $160,000Capital, B 160,000
Capital, C 160,000Total Assets $480,000 Total Equity $480,000
Cash $480,000 Capital, A $160,000Capital, B 160,000Capital, C 160,000
Total Assets $480,000 Total Equity $480,000
Cash $480,000 Capital, A $160,000Capital, B 160,000Capital, C 160,000
Total Assets $480,000 Total Equity $480,000
(1) Revaluingof assets
(3) SpecialP&LSharing
(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 $180,000). The old partners capital accounts are not to decrease (i.e., use the Revaluation / Goodwill method). Betsy’s capital account is credited:a.$ 9,000b.$54,000c.$58,500d.$60,000e.$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:
Contribution 54,000
(-) Implied Capital ( 180,000+ 54,000) × 25% 58,500
= Bonus (Negative) - 4,500
Then : Goodwill to new Partner ( 4,500 ÷ 75%) 6,000
Cash 54,000
Goodwill 6,000
Capital, Betsy 60,000
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 $180,000). Use the Bonus Method. Betsy’s capital account is crediteda.$ 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
Contribution 54,000
(-) Implied Capital ( 180,000+ 54,000) × 25% 58,500
= Bonus (Negative) - 4,500
Cash 54,000
Capital, old Partners 4,500
Capital, Betsy 58,500
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.Contribution 60,000
(-) Implied Capital ( 165,000+ 60,000) × 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
Goodwill 15,000
Capital, Scott (15,000 × 3/5) 9,000
Capital, Steph. (15,000 × 2/5) 6,000
Cash 60,000
Capital, Zoe 60,000
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 $50,000. The total partnership goodwill isa.$ 4,000.b.$20,000.c.$24,000d.$70,000.
10-29
Solution
Excess value of land $50,000x 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 $50,000. The total partnership goodwill isa.$ 4,000.b.$20,000. (5 x [$14,000 - {20% x $50,000}]) c.$24,000d.$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 $145,000Sandy, loan 9,000Other liabilities 17,000Capital, Sandy 20,000Capital, Rees 37,000Capital, 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.
REQUIRED1.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
Assets 5,000Capital, Sandy 1,000Capital, Rees 1,000Capital, Raymond 3,000
PART 2
Capital, Sandy 21,000Capital, Rees 6,000Capital, Raymond 18,000
Cash 45,000
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