Chapter 15
PARTNERSHIPS -- CHANGES
IN OWNERSHIP INTERESTS
Comprehensive Chapter Outline
CHANGES IN PARTNERSHIP INTERESTS
A
B
C
Assignment of an interest:
1
The partnership is not dissolved.
2
An assignee does not become a partner.
3
The assignee is entitled to partner’s share of profits and losses and a share of
partnership assets in the event of liquidation.
4
The only accounting necessary is to record the capital transfer from the assignor
to the assignee.
Admission of a new partner, either by purchasing an interest from old partners or
investing in an existing partnership:
1
Admission of a new partner requires consent of all existing partners
2
The old partnership is dissolved.
3
A new partnership agreement is developed.
4
Without a new agreement, profits and losses are divided equally among the
partners.
Purchase of an interest from existing partners:
1
The partnership receives no new capital.
2
Revaluation/goodwill procedure
a
The revaluation should be completed before the admission of the new
partner.
3
b
Since the partnership receives no money, the amount paid to the old
partners provides little evidence for revaluation and appraisals must be
relied on for an equitable distribution of total partners’ capital.
c
Identifiable assets and liabilities are revalued before goodwill is
recorded.
d
Goodwill is amortized over a maximum of 40 years.
e
An entry is made to transfer capital from the selling partner(s) to the new
partner.
Nonrevaluation/bonus procedure
a
The bonus procedure requires entry to transfer capital of old partners to
new partner’s capital account.
b
Without revaluation, new partner’s capital account may not equal his or
her payments to the old partners.
INVESTING IN AN EXISTING PARTNERSHIP
A
The old partnership is legally dissolved.
B
Noncash investments are valued using the same valuation techniques as used for initial
investments.
C
Investment of the new partner is recorded under the provisions of the new partnership
agreement.
D
Basis for revaluation of the partnership:
1
If the new partner’s capital interest in the total of the old capital plus new
investment is less than the new partner’s investment, there is an implication that
the old partnership had unrecorded asset value. (Illustration 15-2)
a
Revaluation is determined by dividing the new partner’s capital
investment by his or her interest in the new partnership.
b
The unrecorded asset value may be recognized by the goodwill or bonus
approach.
(1)
Goodwill approach:
(2)
2
(a)
The difference between the implied value and the total of
the old capital plus the new investment is goodwill.
(b)
The goodwill is divided among the old partners in their
old profit and loss sharing ratios before the admittance of
the new partners.
Bonus approach: The assets are not revalued, but the difference
between the new partner’s investment and his/her capital credit is
divided among the old partners in their old profit sharing ratios.
If the new partner’s capital interest in the total of the old capital plus new
investment is greater than the new partner’s investment, there is an implication
that the new partner is bringing unidentifiable assets into the partnership.
(Illustration 15-3)
a
The total capital of the new partnership is determined by dividing the old
partners’ capital by the old partners’ interest retained in the new
partnership.
b
The unidentifiable asset value from the incoming partner can be
recognized by either the goodwill or the bonus approach.
(1)
Goodwill approach: Assets are revalued to their fair values and
goodwill to the new partner is recorded.
(2)
Bonus approach:
(a)
Assets are not revalued
(b)
Capital balances of the old partners are reduced for the
bonus to the new partner and the new partner’s capital
account is recorded according to the partnership
agreement.
DISSOLUTION OF A CONTINUING PARTNERSHIP THROUGH DEATH OR
RETIREMENT
A
The old partnership is dissolved and the retiring partner (or estate of a deceased partner)
receives a settlement.
B
If the partnership agreement does not specify a settlement, Section 42 of the Uniform
Partnership Act requires the following:
1
2
C
The deceased or retiring partner’s interest is valued at the date of dissolution.
The retiring partner, or estate of the deceased partner, receives that amount plus
interest as an ordinary creditor.
a
If there is a time lapse between the dissolution and settlement dates, the
capital balance is reclassified as a liability.
b
Any interest on the liability up to the settlement date is an expense of the
partnership.
Recording the settlement with a retiring or deceased partner:
1
If the retiring partner receives an amount equal to his or her final capital balance,
the only entry is a debit to the capital account and a credit to cash.
2
If the retiring partner receives more than the balance in his or her capital
account, an undervaluation of the partnership on the partnership books is
implied. The excess payment can be recorded in one of three ways
3
a
Bonus to the retiring partner: The excess payment to the retiring partner
is charged to the remaining partners in their relative profit sharing ratios.
b
Goodwill equal to the excess payment to the retiring partner is recorded:
Goodwill is recorded to the extent paid for by the continuing partnership,
in other words, only the retiring partner’s share of partnership assets is
revalued.
c
Revaluation of total partnership capital based on the excess payment to
the retiring partner:
(1)
A total undervaluation of the partnership is determined by
dividing the excess payment to the retiring partner by the retiring
partner’s profit-sharing ratio.
(2)
The goodwill is recorded and credited to all partners’ capital
accounts before settlement with the retiring partner.
If the retiring partner receives less than the balance of his or her account, the
partners may agree that the partnership is worth less than its book value.
a
Overvalued assets should be written down to fair values in the partners’
profit-sharing ratios before settlement with the retiring partner.
b
Bonus to continuing partners: A bonus equal to the excess of the retiring
partner’s capital account over the cash paid by the partnership in
settlement of the retiring partner’s interest is credited to the continuing
partners’ capital account balances in their relative profit-sharing ratios.
LIMITED PARTNERSHIPS
A
The unlimited liability characteristic is circumvented in this instance.
1
The limited partnership consisits of at least one general partner, who has unlimited
liability, and one or more limited partners whose risk whose risk is limited to their
equity interest in the venture.
2
The limited partner is excluded from the management of the entity.
B
The partnership agreement must be written, signed by the partners, and filed with the
appropriate state agency.