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Chapter 14 Partnerships: Ownership Changes and Liquidation Chapter 14.

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Presentation on theme: "Chapter 14 Partnerships: Ownership Changes and Liquidation Chapter 14."— Presentation transcript:

1 Chapter 14 Partnerships: Ownership Changes and Liquidation Chapter 14

2 C142 Ownership changes Dissolution - the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business

3 C143 Ownership changes, continued Changes may suggest: The existing assets of the original partnership should be revalued; Previously unrecorded intangible assets exist that are traceable to the original partnership; and/or Intangible assets, such as goodwill, exist that are traceable to a new partner

4 C144 Admission of a new partner Accomplished by either A contribution of assets to an existing partnership –either the bonus or goodwill method of accounting is employed A contribution of assets to an existing partner –generally a transfer of book values from one partner to another

5 C145 The value of assets contributed to an existing partnership unrecognized appreciation on recorded net assets and/or unrecognized goodwill May be in excess of that suggested by the book value of the original partnership’s net assets which suggests that the partnership may have

6 C146 The value of assets contributed to an existing partnership, continued suggests unrecognized depreciation or write- downs on recorded net assets of the original partnership and/or additional intangible assets being contributed by the incoming partner May be less than that suggested by the book value of the original partnership’s net assets

7 C147 Contribution of assets to an existing partnership Bonus Method Goodwill Method

8 C148 The bonus method Total capital of new partnership is: The book value of the previous partnership – Any write-downs in the value of the previous partnership’s net assets + The value of the consideration paid to the partnership by the incoming partner Note: only net asset write-downs (versus write-ups) are recognized

9 C149 The bonus method, continued New partner’s initial capital balance equals the percent interest in the capital of the new partnership Bonus may be either to old partners or the new partner Bonus is allocated based on profit/loss percentages, not interest in capital percentages

10 C1410 Bonus method: No asset write-down suggested Facts. A & B are original partners with a partnership net book value of $200,000. Profit/loss percentages: A = 60%, B = 40%. C acquires 20% interest in capital for $70,000 cash

11 C1411 Bonus method: No asset write-down suggested, continued Analysis Value of new partnership suggested by incoming partner: $350,000 ($70,000  20%) No asset write-down suggested [$350,000 > ($200,000 + $70,000)] Book value of new partnership: $270,000 ($200,000 + $70,000) C’s interest in new partnership: $54,000 (20%  $270,000)

12 C1412 Cash70,000 A, Capital9,600 B, Capital6,400 C, Capital54,000 Journal Entry Bonus method: No asset write-down suggested, continued

13 C1413 Bonus method: Asset write-down suggested Facts. A & B are original partners with a partnership net book value of $200,000. Profit/loss percentages: A = 60%, B = 40%. C acquires 20% interest in capital for $42,000 cash

14 C1414 Analysis Value of new partnership suggested by incoming partner: $210,000 ($42,000  20%) $32,000 asset write-down suggested ($210,000 – [$200,000 + $42,000]) Bonus method: Asset write-down suggested, continued

15 C1415 Analysis, concluded Book value of new partnership: $210,000 ($200,000 - $32,000 + $42,000) C’s interest in new partnership: $42,000 (20%  $210,000) Bonus method: Asset write-down suggested, continued

16 C1416 A, Capital19,200 B, Capital12,800 Net Assets32,000 Cash42,000 C, Capital42,000 Journal Entries Bonus method: Asset write-down suggested, continued

17 C1417 The goodwill method Total capital of new partnership is: The book value of the previous partnership  Unrecognized appreciation or depreciation on the recorded net assets of the previous partnership + Unrecognized goodwill traceable to the previous partnership + The value of the consideration, both tangible and intangible, received from the new incoming partner

18 C1418 The goodwill method, continued Both net asset write-downs and write-ups are recorded New partner’s initial capital balance equals the percent interest in the capital of the new partnership Goodwill may be traceable to the original partners and/or the new partner

19 C1419 Identifying and measuring goodwill traceable to the previous partnership 1. Calculate the value of the partnership suggested by the incoming partner (incoming partner’s contribution divided by the percent interest in capital acquired) 2. Adjust the book value of the original partnership for any unrecognized net asset appreciation or depreciation (continued...)

20 C1420 Identifying and measuring goodwill traceable to the previous partnership (... continued) 3.Calculate adjusted book value of original partnership plus investment of new partner 4.If 1. above is greater than 3. above, goodwill exists and is traceable to the original partners 5.Goodwill is the difference between the value in 1. above and the value in 3. above

21 C1421 Goodwill traceable to the previous partnership Facts. A and B are original partners with a partnership net book value of $200,000. Recorded net assets have a fair value of $220,000. Profit/loss percentages: A = 60%, B = 40%. C acquires 20% interest in capital for $70,000 cash

22 C1422 Goodwill traceable to the previous partnership, continued Analysis. Value of new partnership suggested by incoming partner: $350,000 ($70,000  20%) $80,000 of unrecognized net asset appreciation and/or goodwill is suggested: ($350,000 - [$200,000 + $70,000])

23 C1423 Analysis, continued The $80,000 is allocated – $20,000 ($200,000 vs. $220,000) to unrecorded net appreciation – $60,000 to goodwill Goodwill traceable to the previous partnership, continued

24 C1424 Goodwill60,000 Net Assets20,000 A, Capital48,000 B, Capital32,000 Cash70,000 C, Capital70,000 Goodwill traceable to the previous partnership, continued Journal Entries

25 C1425 Identifying and measuring goodwill traceable to the new partner 1.Calculate the value of the partnership suggested by the incoming partner (incoming partner’s contribution divided by the percent interest in capital acquired) 2.Adjust the book value of the original partnership for any unrecognized net asset appreciation or depreciation (continued...)

26 C Calculate adjusted book value of original partnership plus investment of new partner 4.If 1. above is less than 3. above, then goodwill exists and is traceable to the new partner (continued...) Identifying and measuring goodwill traceable to the new partner, continued

27 C Goodwill is the difference between a) The amount that should have been paid by the new partner, as indicated by the adjusted book value of the previous partnership [(adjusted book value of the original partnership  total percentage interest of the original partners in the new partnership) – the adjusted book value] and b)The amount actually paid by the new partner Identifying and measuring goodwill traceable to the new partner, continued

28 C1428 Goodwill traceable to the new partner Facts. A and B are original partners with a partnership net book value of $200,000. Recorded net assets have a fair value of $220,000. Profit/loss percentages: A = 60%, B = 40%. C acquires 20% interest in capital for $45,000 cash

29 C1429 Analysis Value of new partnership suggested by incoming partner: $225,000 ($45,000  20%) Unrecognized net asset appreciation traceable to original partners: $20,000 ($220,000 - $200,000) Goodwill traceable to the new partner, continued

30 C1430 Analysis, continued The amount that should have been paid by the new partner: $55,000 [($220,000  80%) – $220,000] Goodwill traceable to the new partner: $10,000 ($55,000 - $45,000) Goodwill traceable to the new partner, continued

31 C1431 Journal Entries Net Assets20,000 A, Capital12,000 B, Capital8,000 Cash45,000 Goodwill10,000 C, Capital55,000 Goodwill traceable to the new partner, continued

32 C1432 Contribution of assets to existing partners Generally, a portion of the selling partner’s book value of capital is transferred to the buying partner Example: The book value of B’s capital interest is $50,000. C acquires one-half of B’s capital interest for $30,000: B, Capital25,000 C, Capital25,000

33 C1433 Withdrawal of a partner Withdrawing partner may sell interest to the partnership and/or an individual partner

34 C1434 Selling of an interest to the partnership The bonus or goodwill method may be employed The bonus method will only recognize net asset write-downs (versus write-ups)

35 C1435 Selling of an interest to the partnership, continued If the goodwill method is used generally only net unrecorded appreciation and/or goodwill traceable to the selling partner is recognized net asset write-downs should be recognized to the extent that they are traceable to the whole entity

36 C1436 Partnership liquidation guidelines The UPA establishes rules governing the priority in which partnership assets are distributed The doctrine of “right of offset” combines loans due to partners with the capital balances of partners The liability for debit capital balances is covered by the doctrine of “marshalling of assets”

37 C1437 Partnership liquidation guidelines, continued If debit capital balances are not eliminated, they are allocated to the other partners with credit capital balances All attempts should be made to avoid premature liquidation payments to partners

38 C1438 Marshalling of assets doctrine Applies when a partnership is insolvent (liabilities exceed assets) – unsatisfied partnership creditors can attach to net personal assets – unsatisfied partnership creditors can attach to any solvent individual partner

39 C1439 Marshalling of assets doctrine, continued Applies when individual partners are insolvent (personal liabilities exceed personal assets) – unsatisfied personal creditors can attach to partnership net assets – unsatisfied personal creditors can attach only to the extent of an insolvent partner’s capital balance

40 C1440 Types of liquidation approaches Lump sum liquidation - all assets are in a distributable form and all outside creditors are satisfied before distributions are made to partners Installment liquidation - payments may be made to partners in installments rather than in a final lump sum. Caution must be exercised to insure that no premature distributions are made

41 C1441 Types of liquidation approaches, continued A predistribution plan - developed in advance of actual distributions which serves as a guideline for the order and amount of future distributions

42 C1442 Installment liquidation guidelines The “right of offset” doctrine is employed All liabilities, possible losses, and liquidation expenses are anticipated Prior to a distribution, all remaining non-cash assets are assumed to be worthless

43 C1443 Installment liquidation guidelines, continued With respect to potential debit capital balances, all partners are assumed to be personally insolvent Actual distributions are based on a schedule of safe payments or a predistribution plan

44 C1444 Installment liquidation

45 C1445 Installment liquidation

46 C1446 Predistribution plan Based on how much loss a partner could absorb (i.e., maximum loss absorbable, the MLA) MLA = partner’s capital balance  partner’s profit and loss percent Partner with the largest MLA is the strongest and should be the first to receive a distribution

47 C1447 Predistribution plan, continued Actual distributions reduce partners’ capital balances and their respective MLAs When all partners have equal MLAs they will all receive a distribution


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