Changes in partnership agreement

Changes in partnership agreement

First: The admission of a new partner.

Second: The withdrawal of a partner.
First :The admission of a new partner
A new partner may join a partnership by one of two ways:
1- Presentation of investment in the partnership.
In this case the capital and the assets of the partnership are
going to be increased.
2- Purchase of interest of old partners.
In this case the capital of the partnership will not be changed
since the transaction is a personal transaction between the
partners. (However, sometimes the partners agree to revaluate the
assets and liabilities).
 (1)Presentation of investment in the partnership:
In this case the partner may provide cash or other assets to have a share in
the capital of the partnership. Therefore, the accounting treatment is using one
of the following methods:
1- The goodwill method.
2- The bonus method.
Knowing that the goodwill or the bonus may be to the old partners or the new
partner.
First : The goodwill method:
The following steps should be applied:
1) Determine the total paid in capital (old partners capital + capital provided by
the new partner).
2) Determine the total required capital (capital after admission) and the partners
share in this capital.
3) The goodwill is the difference between the total paid in capital and required
capital of the partnership.
- If the two figures are equal so there is no goodwill.
Who will take the goodwill??
1- The goodwill to the old partners:
If their capital before the admission is less than their capital after the
admission.
2-The goodwill to the new partner :
If his paid in capital is less than his share in the capital after the
admission.
Second: The bonus method:
If the partners do not change the book values of assets before the
admission, here we can use the bonus method and the bonus may be to the
new partner or to the old partners as follows:
1- The bonus to the old partners:
If the amount paid by the new partner more than his share in the capital
2- The bonus to the new partner:
If the amount paid by the new partner less than his share in the capital
 Example (1)
A and B are partners in a general partnership. They share the net
income on a ratio of 2:3. Partner (C) is to be admitted to the
partnership for an interest of 1/3 in capital, and 25% of net income.
Before admission, the partners had the following capital balances:
A B
Capital 30000 90000
Partner (C) will present the following assets:
Cash 10000
Building 30000
The partners agreed that the capital after admission will be 180,000.
Required:
Prepare the journal entry to record the admission of partner (C)
using the goodwill method.
 Paid in capital Capital after
admission
Partner A 30000
Partner B 90000
Partner C 40000 60000 (180000 * 1/3)
Total 160000 180000
- The total paid in capital (160000) < total capital after admission (180000) so
there is goodwill.
-The paid in capital of the new partner (40000) < his share in the capital after
admission (60000 = 180000 * 1/3) so there is a goodwill of 20000 and belong to the
new partner
Dr Cr
Cash 10000
Building 30000
goodwill 20000
Capital, C 60000 Share in the capital after admission
 Example (2)
A and B are partners in a general partnership. They share the net
income on a ratio of 2:3. Partner (C) is to be admitted to the
partnership for an interest of 1/3 in capital, and 25% of net income.
Before admission, the partners had the following capital balances:
A B
Capital 30000 60000
Partner (C) will present : Cash 50000
The partners agreed that the capital after admission will be 150,000.
Required:
Prepare the journal entry to record the admission of partner (C)
using the goodwill method.
 Paid in Capital after admission
capital
Partner A 30000
Partner B 60000
Partner C 50000 50000 (150000 * 1/3)
Total 140000 150000
•The total paid in capital (140000) < total capital after admission (150000) so there is goodwill.
•The paid in capital of the new partner (50000) = his share in the capital after admission
(50000 = 150000 * 1/3)
So the goodwill of 10000 belongs to the old partners.
We allocate the goodwill using the ratio of profit and loss of old partners before the admission
Partner A’s share = 10000 *( 2/5)= 4000 (A’s capital after admission = 30000 + 4000 = 34000)
Partner B’s share = 10000 *( 3/5) = 6000 (B’s capital after admission = 60000 + 6000 = 66000)
Dr Cr
Cash 50000
goodwill 10000
Capital, (C) 50000 Share in the capital after admission
Capital, A 4000 Share in the goodwill
Capital, B 6000 Share in the goodwill
 Example (3)
A and B are partners in a general partnership. They share the net
income on a ratio of 2:3. Partner (C) is to be admitted to the
partnership for an interest of 25%in capital, and net income.
Before admission, the partners had the following capital balances:
A B
Capital 40000 80000
Partner (C) will present : Cash 50000
Required:
Prepare the journal entry to record the admission of partner (C)
using the bonus method.
 Paid in capital Capital after admission
Partner A 40000
Partner B 80000
Partner C 50000 42500 (170000 * 25%)
Total 170000 170000
When we use the bonus method , it means that the total paid in capital must equal
the total capital after admission, so it equals (170000) .
•The paid in capital of the new partner (50000) > his share in the capital after
admission (42500 = 170000 * 25%) so there is a bonus of 7500 (50000 – 42500) to the
old partners. The bonus will be allocated on a ratio of 2:3 and will be added to their
capitals.
(A) = 7500 *(2/5) = 3000 (A’’s capital after admission = 50000 + 3000 = 53000)
(B) = 7500 * (3/5) = 4500 (B’s capital after admission = 70000 + 4500 = 74500)
Dr Cr
Cash 50000
Capital, C 42500 (Share in the capital after admission)
Capital, A 3000 (Bonus added)
Capital, B 4500 (Bonus added)
 Example (4)
A and B are partners in a general partnership. They share the net
income on a ratio of 2:3. Partner (C) is to be admitted to the
partnership for an interest of (1/3) in capital, and 25% of net
income. Before admission, the partners had the following capital
balances:
A B
Capital 40000 80000
Partner (C) will present : Cash 30000
Required:
Prepare the journal entry to record the admission of partner (C)
using the bonus method.
 Paid in capital Capital after admission
Partner A 50000
Partner B 70000
Partner C 30000 50000 (150000 * 1/3)
Total 150000 150000
When we use the bonus method , it means that the total paid in capital must equal the total
capital after admission, so it equals (150000) .
•The paid in capital of the new partner (30000) < his share in the capital after admission (50000
= 150000 * 1/3) so there is a bonus of 20000 (50000 – 30000) to the new partner(C).
• The bonus will be allocated on a ratio of 2:3 and will be deducted from the old partners’
capital.
(A) = 20000 *(2/5) = 8000 (A’s capital after admission = 50000 - 8000 = 42000)
(B) = 20000 * (3/5) = 12000 (B’s capital after admission = 70000 - 12000 = 58000)
Dr Cr
Cash 30000
Capital, A 8000 (Bonus deducted)
Capital, B 12000 (Bonus deducted)
Capital, C 50000 (Share in the capital after admission)