Purchase of a partners interest the admission by

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Purchase of a Partner’s Interest The admission by purchase of interest, is a personal transaction -- separate from the partnership entity, between one or more existing partners and the new partner with a price negotiated by the individuals involved. The money that the old partner receives from the new partner as a result of the purchased interest, is the personal property of the old partner and not the property of the partnership. To illustrate, only the transfer of partner’s capital is recorded. The old partner’s capital account is debited for the ownership claims that have been given up. The new partner’s capital account s credited with the ownership interest purchased. Total assets, liabilities and capital is unchanged. Investment of Assets in a Partnership The admission by investment is a transaction between new partner and partnership. This transaction increases both the net assets and total capital of the partnership. Debit the asset and credit the capital account of the new partner. In the event of a partner leaving, here’s an example: Partnership Capital balances -- Roman $50,000; Sand $30,000; Terk $20,000 Income Ratio: 3:2:1 Terk Retires and receives $25,000 from the firm 1. Subtract the departing partner’s capital balance from the cash paid by the partnership a. $25,000 - $5000 2. Allocate the bonus to remaining partners on the basis of their income ratio a. Roman and Sand ratio is 3:2 b. Allocation of bonus is: i. $3000 to Roman ($5000 x )
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ii. $2000 to Sand ($5000 x ) 3. Debit the entire capital account of retiring partner, debit the bonus on the remaining partner capital accounts a. Terk $20,000 b. Roman $3000 c. Sand $2000 4. Credit the Asset being lost a. Cash $25,000 Bonus to Remaining Partners Departing partner may give a bonus to the remaining partners if: 1. Recorded assets are overvalued 2. Partnership has poor earnings record 3. Partner is anxious to leave partnership In such case, cash paid to departing partner will be less than departing partner’s capital balance. The bonus is credited t the capital accounts of remaining partners based on their income ratios. To illustrate, let’s say Terk is paid only $16,000 for the $20,000 capital balance: 1. Bonus to remaining partners is $4000 ($16,000 - $20,000) 2. The allocation of the $4000 bonus is $2400 to Roman ($4000 x ) and $1600 to Sand ($4000 x ) 3. Debit retiring partner capital account of $20,000 4. Credit $2400 to Roman and $1600 to Sand for their bonuses. 5. Credit the Bonus given to retiring partner (Terk) of $16,000 or in other words, difference between 3 and 4 Liquidation of a Partnership Liquidation of a partnership terminates business by selling assets, paying liabilities and distributing remaining assets to partners. Liquidation results from mutual agreement of partners, death of partner or from bankruptcy. In contrast to the dissolution of a partnership, a partnership liquidation ends both legal and economic life of entity.
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