Partnerships – Changes in

Ownership Interests

Chapter 16
Value new partners’ investment
in an existing partnership.

Learning Objective 4
 The existing legal partnership entity is
dissolved when a new partner is admitted
or an existing partner retires or dies.

Changes in Partnership
Interest
 Admission of a new partner:

1. Purchase of an interest from existing partners

2. Investing in an existing partnership

Changes in Partnership Interest

1. Purchase of an interest from
existing partners
Goodwill Method

Bonus Method

See Page 541-543

Purchase of an interest without revaluation
Purchase of an interest without revaluation
Goodwill Method
 Goodwill Method

Cob paid directly to partner $50,000 for 50% interest

total new capital = $50,000 / 50% = $100,000
Goodwill = $100,000 – ($50,000+$40,000) = $10,000
Goodwill Method
Bonus Method
Bonus Method
Investing in an existing
partnership
Goodwill Method

Bonus Method

See Page 544-546

Goodwill Method
 Goodwill Method

1/3 of partnership value = 1/3 x $130,000 =

$43,333 < $50,000
 Goodwill (Bonus) for Old partner
Goodwill to OLD partner
Bonus to OLD partner
 Goodwill Method

40% of partnership value = 40% x $130,000

= $52,000 > $50,000
 Goodwill (Bonus) for New partner
Goodwill to NEW partner
Bonus to NEW partner
 Value partner’s share upon
retirement or death.

Learning Objective 5
 Profit and
Capital Percentage Loss
Balances of Capital Percentage
Ann $ 70,000 35% 40%
Mic 50,000 25 20
Jus 80,000 40 40
Total capital $200,000 100% 100%

Dissolution of a Continuing Partnership

Through Death or Retirement
 Jus decides to retire.

The partners agree that the business is

undervalued on the partnership books
and that Jus will be paid $92,000.

Dissolution of a Continuing Partnership

Through Death or Retirement
 First option:
Jus, Capital 80,000
Ann, Capital 8,000
Mic, Capital 4,000
Cash 92,000
Second option:
Jus, Capital 80,000
Goodwill 12,000
Cash 92,000

Bonus to Retiring Partner

 Goodwill (other assets) 30,000
Ann, Capital 12,000
Mic, Capital 6,000
Jus, Capital 12,000

Goodwill Reevaluation = 12,000 : 40% = 30,000

Reevaluation of Total
Partnership Capital
 Suppose that Jus is paid $72,000
in final settlement of his capital interest.

Jus, Capital $80,000

Payment 72,000
Over-value Assets Jus $ 8,000
Negative Goodwill=8,000:40%=20,000

Payment to Retiring Partner

Less than Capital Balance
Ann, Capital 8,000
Mic, Capital 4,000
Jus, Capital 8,000
Net assets 20,000

Jus, Capital 72,000

Cash 72,000

Overvalued Assets
Written Down
Jus, Capital 80,000
Ann, Capital 5,333
Mic, Capital 2,667
Cash 72,000

Ann, Capital = 40/60 x 8,000 = 5,333

Mic, Capital = 20/60 x 8,000 = 2,667
Bonus to Continuing
Partners
 Understand limited liability
partnership characteristics.

Learning Objective 6
 The limited partnership consists
of at least one general partner
and one or more limited partners.

The limited partner is excluded from

the management of the business.

Limited Partnerships
Even
and
Odd

Class assignment - 2
End of Chapter 16
Never leave for tomorrow what
You can do today
(Benyamin Franklin)