Partnership Dissolution_Admission of a partner_1

Admission of a new Partner

The admission of a partner into the partnership depends on the following:

• the purchase of capital interest from one or more partners.
• the investment of assets into the partnership in exchange for an interest.

Admission by Purchase

The admission of a partner through the purchase of interest takes place when an interested person pays an amount directly to the selling partner/s for an interest in the partnership.  This becomes a personal transaction between them.  Any cash or non-cash transferred will not affect the total assets of the partnership unless a revaluation is required prior to the admission of the said person.  Only the capital structure of the partners' capital will be affected.  Below are sample problems with corresponding solutions to illustrate the said concept.

Illustrative Problem 1:

On January 1, 2015, the balance sheet of ADVANCED partnership is summarized below:


   

Cash                                            P 120,000	Accounts payable                                 P   80,000
Non-cash assets                             580,000	Ad, Capital                                              260,000
	Vanced, Capital                                      360,000
Total Assets                               P 700,000                                                    ========	Total Liabilities & Capital                   P 700,000                                                            ========

Ad and Vanced share profits and losses at 40:60 ratio, respectively.  On the same date they agreed to take in Kid as a new partner.  They sold 25% of their interest.  The payment by Kid is to be made directly to the partners.

Prepare the journal entries to record the admission of Kid assuming total payment amounted to P 160,000

Solution to Illustrative Problem 1:

Step I.  Determine the amount capital to be credited to the new partner by multiplying the interest rate acquired and the capital of the partners as shown below:

Ad, capital                              P 260,000 x 25% = P  65,000
Vanced, capital                       P 360,000 x 25% = P  90,000
Total capital interest acquired                               P 155,000
                                                                              ========  
Step 2. Prepare the entry to record the transaction.  The entry below will be prepared whether the payment of the incoming partner is equal, less or more than his capital interest being acquired

Date	Particulars	F	Debit	Credit
2015
Jan 1	Adv, capital		65,000
	Vanced, capital		90,000
	Kid, capital			155,000
	To record the sale of                     interest to Kid.

Analysis:

Interest Acquired     (P 65,000 + P 90,000)     P155,000
Amount paid by Kid                                            160,000
Bonus to Ad and Vanced                                 P    5,000
                                                                        ========  

Exercises 1:

On April 13, 2015, the financial condition of Native Initiative, a partnership is summarized below:
                           
                              Net Assets                                           P 250,000
                              Pedro, capital                                         100,000
                              Juan, capital                                             80,000
                              Maria, capital                                            70,000

The partners shared profits and losses at 20:40:40 ratio, respectively.  The partners needed additional fund for their operation.  On this date, they have decided to invite Clara to join the partnership.  Clara has purchased 1/5 interest of the Native Initiative partnership for P 38,000.  Prepare the entry to record the transaction.

Exercise 2:

 Using the information given in Exercise 1, compute the new capital balance of Juan after admission of Clara.

Exercise 3:

Using the information given in Exercise 1, what is the new P/L ratio of the partners (including Clara) assuming the partners are to retain their original P/L ratios?