2. Chapter 4 Partnership 2 Partnership change

3. Two Possibilities for Partnership Changes Expansion ---- Change of profit-share ratio ----Admission of new partners ----Two partnership Amalgamation Diminution ----One of partner retire or die ----Convert into corporation

4. Two kinds of partnership changes Constructive changes and Real changes

5. Constructive Changes Definition: Each capital has changed but no change in total capital Transactions result to constructive changes: 1. To vary profit-share ratio. 2. To admit new partner as replacement for an existing partner.

6. Real Change in Partnership Definition: Both the individual capitals and total capital have changed in the real changes. Transactions result to real changes: 1. To admit new partner 2. One or more staff turn to partners. 3. Amalgamation. 4. One or more partners retire 5. Be purchased

7. Vary Profit-share Ratio 1. At beginning of operation Adjust individual capital directly according to the new profit-share ratio 2. At the end of operating time. A. To record all gains and losses (fair value) in the books. B. To split the gains or losses into partners’ capital according to old profit-share ratio. C. To adjust individual capital according to the new profit-share ratio, after step A and B

8. Fair value and goodwill Tow types of goodwill: purchase goodwill non-purchase goodwill accounting for non-purchase goodwill 1. Evaluate it 2. Accounting for it to adjust the individual capital.

9. Accounting for non-purchase goodwill Step 1. Dr. Cr. Goodwill evaluated assets current a/c Split the value ----A. B. C…. among A.B.C based on the Old profit share ratio To record goodwill in book

10. Write off non-purchase goodwill Step 2: Dr. Cr. Current a/c Split the value among A.B.C based on the new profit-share ratio Goodwill the evaluated

11. Case study 4-1 On January 1, 2000, Partner A and Partner B organized a partnership and agreed that each partner should put in $50,000 to the partnership and that the profit-share ratio was equal. After one year operation, a new partner C is admitted with an agreement that the new partner should put in $10,000 to the partnership and now the new profit-share ratio is 6:3:1 for A.B.C. when the new partner admitted, the fair value of assets contributed by A and B has exceed to it book value by $1,000. You are required: Calculating the capital adjustment among A.B and C. Preparing the Capital balance of each capital books.

12. Example 4.1----provision for bad debts provision for debts a/c Balance b/d 2,800 occurred during this period X Balance c/d 3,200 xxxxx xxxxx balance b/d 3,200

13. Profit and loss a/c

14. Draft profit and loss appropriation a/c

15. Current a/c ___Intermediate High Balance b/d 30,000 Cash withdraw X Balance b/d 22,000 Low Balance b/d 5,000 Cash withdraw Y Balance b/d 10,000

16. Current a/c ___ Final High Balance b/d 30,000 Cash drawing 52,000 Interest on capital 4,875 Profit share -1st period 4,465 Balance c/d 4,110 -2nd period 16,770 56,110 56,110 Balance b/d 4,110

17. Current a/c __final Low Balance b/d 5,000 Cash Drawing 15,000 Interest on Capital 4,125 Profit Share -1st period 4,465 Balance c/d 15,360 -2nd period 16,770 30,360 30,360 Balance b/d 15,360

18. Current a/c ___ final medium Salary 5,000 Cash drawing 5,000 Interest on capital 1,000 Balance c/d 6,590 Profit share 5,590 11,590 11,590 Balance b/d 6,590

19. Accounting for amalgamation of partnerships Steps of amalgamation: 1. Revaluation base on the fair value 2. Post the revaluation differences and adjust the individual capitals 3. Amalgamate it and accounting for constructive change, if any. 4. Reverse the revaluation if it agreed.

20. Case study for Amalgamation

21. Adjustment of capital To set individual capital at the largest amount, Bill and Carrol should further pay $2,000 and $19,000, the journal entry would be: $ $ Bank 21,000 Bill capital a/c 2,000 Carrol capital a/c 19,000

22. An alternative way of amalgamation Step 1, transfer all non-cash asset to the realization a/d at book value Step 2, Credit realization a/c with realized value offered by the new partnership Step 3, Transfer the balance on the realization a/c to the capital a/c

23. Step 1 ---Carrol Realization Account Vehicle 10,000 New Partnership Stock 30,000 53,000 Current a/c 13,000

24. Step 1---Alpha and Bill Realization Account Vehicles 16,000 New Partnership Stock 91,000 141,000 Current a/c --Alpha 17,000 -- Bill 17,000

25. Step 2 Capital a/c — Alpha and Bill Capital a/c----Alpha Balance b/d 50,000 Current a/c 10,000 Balance c/d 77,000 Realization a/c 17,000 Capital a/c ---Bill Balance b/d 50,000 Current a/c 8,000 Balance c/d 75,000 Realization a/c 17,000

26. Step 2 -- Hector Capital a/c Balance b/d 45,000 Balance c/d 58,000 Realization a/c 13,000

27. Capital a/c---New partnership Alpha Balance b/d 77,000 Bill Balance b/d 75,000 Hector Balance b/d 58,000 Total capital 210,000

28. Case study 4.2

29. Case 4.2

30. Case 4.2 continued

31. Summary In this chapter we have considered changes to the partnership that do not result in the cessation of the partnership. We saw that these can be simple changes to the partnership agreement, considering the relative rights of the partners after the change of terms has been implemented. The change can also be means of expanding the partnership either by admitting a new partner or combining two partnerships. Both types of changes are seen in professional accounting partnerships, that is, one in which a manager is admitted as a partner in order to retain his services or one in which two partnerships combine in order to be better able to provide a range of services. Examples of the latter may include the rationalization of the training effort for the trainee staff or the increase in services available to clients.