PARTNER WITHDRAW FROM THE PARTNERSHIP.
THE FIRST TOPIC WAS WHEN THE PAYMENT OF THE CAPITAL OF THE WITHDRAWING PARTNER WILL BE PAID BY THE EXISTING PARTNERS MONEY.
THIS FOLLOWING TOPIC IS WHERE THE PARTNERSHIP FUNDS WILL BE USED TO PAY THE CAPITAL OF WITHDRAWING PARTNER.. IN THIS TYPE OF METHOD THE PARTNERSHIP CAPITAL IS DECREASE.
THE PROCEDURE;
1. A PREMIUM to withdrawing partner ( payment above book value)
a. bonus. the amount of premium is debited to remaining partners.
b. partial goodwil method, premium is treated as goodwll representing share of the outgoing partner.
c. full goodwill .
2. DISCOUNT from withdrawing partner( [pay below book value)
a. bonus method. the discount amount is credited to the partner.
b. partial revaluation
c. full revaluation.
ILLUSTRATIVE EXAMPLES. THIS IS CALLED PREMIUM
A, B C, share profits at 20%, 30% , 50%. C decided to retire . the following capital balances
A 25,000
B 40,000
C 35,000
CASE 1 he was paid 39,000., BONUS TO HIM of 4,000 but charged to the capital account of A,. B.
C CAPITAL 35,000
A. CAPT 1600
B CAPT 2400
CASH 39,000
to record the payment of 39,000 using the firm cash but charging the capital of A, B for the bonus given to C.
considering that the partnership money will be used to pay C, IT IS OF COURSE CREDITED TO CASH ACCOUNT , AND NOT CREDITED TO THE CAPITAL OF A, B. ANYWAY. IT HAS THE SAME EFFECT BECAUSE WHEN YOU CREDIT CASH THE ASSET CASH IS REDUCED AND THE CAPITAL IS REDUCED , SO assets is decreased but capital is also decreased,NO CHANGE IN THE BALANCE SHEET. BUT WHEN YOU CREDIT THE CAPITAL OF A, B, AND DEBIT CAP OF C , NO CHANGE IN THE total assets , also no changed in the capital. .
Since it was agreed that the firm will pay C for 39,000 despite , his capital of only 35,000, or an excess of 4,000, this amount shall be charged to the capital account of A. B for having given bonus to C.
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CASE 2. , still he was PAID 39,000.00 but the existing partner capital will not absorb the 4,000 , INSTEAD OF DEBITING THE CAPTIAL OF A, B , THE GOODWILL ACCOUNT WILL BE DEBITED THAT MEANS A, B WILL NOT ABSORB THE EXCESS PAYMENT.
NOTE THAT THE 4,000 GOODWILL IS ONLY APPLICABLE TO GOODWILL ATTRIBUTABLE TO SHARE OF C OF 50%. THIS IS PARTIAL GOODWILL APPROACH.
GOODWILL 4,000
C CAPITAL 35,000
CASH 39,000
TO pay C for 39,000 for his capital of 35,000 , the difference is charged to GOODWILL ACCORDED TO THE FIRM.
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CASE 3 . STILL he was paid 39,000,. THIS TIME THE GOODWILL IS CALLED FULL GOODWILL. THAT MEANS THE WHOLE GOODWILL OF THE FIRM .
GOODWILL 4,000 divide 50%) 8,000
C. CAPITAL 35,000
CASH 39,000
A. CAPITAL 4,000 x( 20% divide 50% 1,600
B CAPITAL X 30%DIVIDE 50% 2,400
to recognize the full goodwill , pay C 39,000, AND to credit the capital of A, B for the goodwill applicable to them.
the 4,000, difference between actual cash paid of 39,000 against the ccapital of C OF ONLY 35,000, IS ONLY 50% OF THE TOTAL GOODWILL since C SHARE IS 50%. SO TO ARRIVE AT THE GROSS GOODWILL , 4,000 DIVIDE THE SHARE OF C OF 50% = 8000==================
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ILLUSTRATIVE EXAMPLE : DISCOUNT APPROACH:
CASE 1 BONUS METHOD : C WAS ONLY PAID 32,000 , 3,000 BELOW HIS CAPITAL OF 35,000
C CAPITAL 35,000
CASH 32,000
A CAPITAL 3,000 X( 20% div 50%) 1,200
B CAP X (30%div 50% 1,800
to pay 32,000 to C FOR HIS CAPITAL OF 35,000 , the short payment of 3,000 shall favor the account of A, B.
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CASE 2 : PARTIAL REVALUATION OF ASSETS .
C CAPITAL 35,000
ASSETS 3000
CASH 32,000
to record the 3000 assets revaluation attributable to C, that means that 3,000 applies to his share only . THE short payment to C is attributable to the overvaluation of assets on his share only , hence a credit to an asset is made .
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CASE 3. FULL REVALUATION OF ASSETS:
C CAPITAL 3,000
A. CAP 1,200
B CAP 1800
ASSETS 6,000
to revalue the assets to cover the whole of the three partners share , since it is considered that the 3,000 shortage of payment to C represents an overvaluation of assets , that 3,000 is 50% of the whole assets overvaluation. , so 3,000 divide 50% equal the total overvaluation. Since the revaluation involves A, B their capital is debited to reduce it as a consequence of assets reduction.
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DEATH OF A PARTNER
IN CASE OF DEATH OF A PARTNER :
1. THE FIRM IS AUTOMATICALLY DISSOLVES
2. THE AFFAIRS OF BUSINESS IS WINDED UP OR SURVIVING PARTNERS MAY CONTINUE
IF THEY WILL NOT CONTINUE, THEN:
1. NON CASH ASSETS ARE SOLD , LIABILITIES ARE PAID AND REMAINING ASSETS DISTRIBUTED TO ALL THE PARTNERS.
IN THE EVENT THE REMAINING PARTNERS WANT TO CONTINUE OPERATION:
1. continue operationt till the end of the accounting period. then closed the books, then dividing the profit into two parts, one part is during the lifetime of the deceased partner, the other part , after the death of the partner by doing as ff:
a. the profit attributable to the period before the death is divided using the regular profit and loss ration
b. the profit after the death is divided among the surviving partners in their ratios.
2. another approach is to compute for the average profit during the previious years.
a. this average is considered earned proportionately during the year.
3. if agreed upon, they may call for the appraisal of the assets .
4. the deceased partners interest mayb sold to
a. outsider.
b. surviving partner.
V, X, Y , Z, shares profit, 5: , 3: 2: 5 respectively, . On jan 1 their capital balances
SHARE RATIO
V 550,000 5
X 430,000 3
Y 360,000 2
Z 250,200 5
Z DIED AUG 31 . pROFITS FOR THE PAST YEARS WERE
297,750 184985 281500
THE ESTATE OF THE DECEASED AGREED TO ACCEPT FULL SETTLEMENT OF PRONOTE AT 200,000 AT12% INTEREST AND THE REMAINING IN CASH.
an immediate settlement is desired as of jULY 31 AND THE AVERAGE NET PROFIT IS USED.
1. MAKE AN ENTRY to record the share of Z in the estimated profit for the current year.
2. an entry to record settlement of estate.
the average profit for three years is 254,745.00 x 662/3% =169,830.00 ( 8months divide 12mos= 662/3%.
estimated from jan aug 31 169,830.00
share ratio 33 1/3% 5 DIVIDE 15
SHARE IN PROFITS 56,610
ENTRY
Z CAPITAL 306,810
NOTES PAY 200,000
CASH 106,810
to record the payment for Zcapital , balance by pronote
NOTE: in converting share ratios not represented by %, simply add all of the whole number to represent 100% or as the total . to get the share % ., divide that number by the total number.
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BUT INSTEAD OF SETTLING AS OF AUG 31, THE FIRM
CONTINUED UNTIL DECEMBER 31 AND REALIZED PROFIT OF 258,750.00
JOURNAAL ENTRY TO DISTRIBUTE FOR THE PERIOD PRIOR TO Z DEATH
258,750 X 66. 2/3% = 172,500 NET PROFIT FROM JAN TO AUG 31.
172,500 DIVIDED BASED ON THEIR SHARE RATIO AS FF:
V X Y Z
X 5/15 3/15 2 /15 5/15
57,500 34,.500 23,000 57,500
income exp summary 172,500
V CAP 57,500
X 34,500
Y 23,000
Z 57500
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JOURNAL ENTRY TO DISTTRIBUTE PROFIT AFTER DEATH OF Z SEPT TO DEC.
TOTAL PROFIT 12MONTH 258,750
LESS .jAN TO AUGUST 172,250
SEPT TO DEC 86,250
INCOME EXP. 86,250
V CAP 43,125
X CAP 25,875
Y 17,250
TO DISTRIBUTE INCOME TO THE SURVIVING A PARTNERS
Z CAP 307,700
CASH 200,000
NOTES 107,700
to pay Z ESTATE CASH OF AND THE BALANCE THRU PRONOTE
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SALE OF PARTNERSHIP BUSINESS
The procedures involves four accounting entries
1. to charge buyer with the assets transferred
2. to credit buyer with the liabilities transferred
3. to record receipt of payment from he buyer.
4. to record distribution of remaining assets to the partners.
the sale of partnership business for a lump sum may be sold as ff:
1. SALE AT BOOK VALUE= the partnership is sold at book value using the four basic entries.
2. SALE AT ABOVE BOOK VALUE = where the selling price exceeds the book value, the excess may be debited to goodwill and credit to capital.
3. sale at below book value = where the sell price is below book value, the resulting loss is usually debitd to the capital.
ILLUSTRATIVE EXAMPLE:
JOE , AND MARK who share profits and loss at 60% and 40% respectively.
CASH 20,000 PAYABLE 150,000
ACCTS RECE. 350,000
iNVENTORY 200,000
FIXED ASSETS 150,000
accu.depn (20,000 ) JOE, CAP 306,000
bad debts (20,000) mark cap 224.000
total 680,000 total 680,000
TONY wants to buy the partnership
CASE 1
journal entries to record sale , and to close partnership , if sold for 660,000
A/R 660.000
ALLO. BAD DEBTS 20,000
ALLO. DEPN 20,000
A.R. 350,000
INVENTORY 200,000
FIXED ASSETS 150,000
to SEll the NET ASSETS except cash to TONY 660,000. at book value.
ACCTS PAYABLE 150,000
CASH SUPPLIER 150,000
TO PAY SUPPLIER.
JOE CAPITAL 306,000
MARCK CAPI 224,000
CASH 530,000
to pay JOE, AND MARK for their balalnce of capital.
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CASE TWO 2
JOURNAL ENTRIES TO RECORD SALE FOR 760,000.00
Since the cost of the partnership is more than its book value, it is considered that the assets is undervalued, therefore , therefore the total assets must be readjusted to make it 760,000 or an additional of 100,000 representing GOODWILL. this goodwill is giving due respect for the buyer by increasing the value of the assets he will purchase.
entry:
1. GOODWILL 100,000
JOE CAPITAL 60,000
MARK CAPITAL 40,000
to recognized goodwill in the books and will increase the capital .
2. CASH 760,000
ALLO. DEPN 20,000
RES FOR BAD DEBTS 20,000
A.R. 350,000
INVENTORY 200,000
FIXED ASSETS 150,000
GOODWILL 100,000
TO RECORD CLOSING OF ASSETS AND THE RECEIPT OF 760,000
3. ACCTS PAY 150,000
CASH 150,000
TO PAY SUPPLIER.
4 JOE CAPITAL 378,000
MARK CAPITAL 252,000
CASH 630,000
TO PAY THE PARTNERS OF THEIR FINAL CAPITAL
Prior to the closing distributing , all assets except cash has a balance as ff:
beg balance 20,000
add payment from buyer 760,000
less payment of accts. pyable 150,000
balance of cash 630,000
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CASE THREE
Journal entry if firm is sold for 460,000.
1. CASH 460,000
ALLOW BAD DEBTS 20,000
ACCU. DEPN 20,000
JOE CAPT 120,000
MARK CAP 80,000
A/R 350,000
INVE 200,000
FIXED ASSETS 150,000
To record sell of assets below book value , the 180,000 shortage from book value were charged to the existing partners capital.
do not expect to debit loss on sale of business, direct charged to capital.
total assets net of depn, bad debts except cash 660,000
purchase price 460,000
loss on sale 200,000
2. APAY 150,000
CASH 150,000
TO PAY SUPPLIER
3. JOE CAPITAL 198,000
MARK CAPITAL 132,000
CASH 330,000
to pay the partners for their remaining capital
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CASE 4 SOLD AT 460,000 BUT TO INCLUDE LIABILITIES BUT AFTER SOME ASSETS ARE REVALUED AS FF:
A/R 300,000
INVENTORY 150,000
FIXED ASSETS 135,000
TOTAL 585,000
LESS ORIGINAL 700,000
DECLINE 115,000
entry: 1
JOE CAP 18,000
MARCK CAP 12,000
ALLO FOR BAD DEBTS 30,000
to adjust allowance for debts from 20,000 to 50,000 so that the net AR is 300,000
entry 2
accu. depn 5,000
JOE CAP 3000
MARKCAP 4,000
to adjust accu. depn due to perceive overdepreciation as a result of the revaluation, the net assets is 150,000 less 20,000 depn or 130,000 but it was revalued at 135,000, so there is an overdepn.of 5,000.
entry 3.
JOE CAPT 30,000
MARK CAP 20,000
INVENTORY 50,000
to reduce the inventory value as a result of revalution
entry 4
JOE 261000
MARC CAP 174,000
ACCTS PAYABLE 150,000
\ALLO. BAD DEBTRS 50,000
ACC. DEN 15,000
A/R 350,000
INVENTORY 150,000
FIXED ASSETS 150000
To close accts payable , allow bad debts, accu. depn., AR, FIXED ASSETS, INVENTORY BALANCES, charged to the account capital
CASH 460,000
JOE CAPITAL 276,000
MARK CAP 184,000
TO record payment for the selling of the partnership assets and liabilities.
JOE CAPT 280,000
MARC 200,000
CASH 480,000
to record payment to partners for the final balance of their capital. computed as ff:
beg capital 530,000
add: decrease of depn. 5,000
add: payment for the sale of partnership 460,000
less: decrease in inventory (50,000 )
closing of assets liabilities ( 435,000)
less increase in a allo. bad debts ( 30,000)
balance of capital 480,000
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