Admission of the new partner Admission means adding a new partner to an existing partnership. The admission of a new partnership transfers the old partnership to become a new partnership. Before recording the admission, record all the agreed upon corrections, adjustments and revaluations of assets and liabilities of the old partnership. These corrections are to be made directly in relation to the old partners’ capital accounts in accordance with their old profit/loss ratio. Show
Consider the following notes when solving admission cases: 1. Solve under the purchasing way if the word purchase is mentioned. 2. Under the purchasing way, don't record any asset paid by the new partner. 3. Solve under the investment way if the word invest or contribute is mentioned. 4. If the difference in problem test is negative, a bonus or goodwill will be given to old partners. 5. If the difference is problem test is positive, a bonus or goodwill will be given to the new partner. 6. If the difference in problem test is zero, no bonuses or goodwill is to be given to any partner. 7. Goodwill or bonus is to be allocated according to old partners' profit/loss ratio. 8. Use the bonus method in the following cases: If he statement "without recognizing any goodwill" is mentioned. If total capital after admission = total capital in problem test. 9. Use the goodwill method in the following cases: If the statement ".. a goodwill" is mentioned. If the new partner is to receive capital interest equal to his/her contributions (investments). If old partners will not decrease their capital balances. If total capital after admission ≠ total capital in problem test. 10. Goodwill to the old partners =difference in problem test ÷ ratio of capital interest of the new partner 11. Goodwill to the new partner = difference in problem test ÷ ratio of capital interest of old partners together Problem test is to calculated as follows:Capital interest to be acquired by new partner Percentage or ratio of capital interest of the new partner (capital balances of old partners + investments by the new partner) XX Less: Investments by the new partner (XX) Difference XX Question (On Admission):"Badr and Bakr" admit Amr to their partnership forming a new partnership at the start of the year 2004. Just before the admission of Amr, the capitals of Badr and Bakr after introducing revaluation of tangible fixed assets were LE 3000 and LE 1000 respectively. The two partners were sharing net income in a ratio bases on their capital balances at the end of the period. Required: Record the admission of Amr under each of the following independent conditions: (A) Amr Purchased 100% of Badr's capital interest paying him personally LE 6000 cash where a new partnership is formed under the name "Bakr & Amr Co." (B) Amr paid in the partnership LE 2000 cash interest in the new partnership "BBA Co." and insisted to have a capital interest equal to his cash investment and to have a one-third capital interest in the "BBA Co." (C) Amr invested LE 2000 cash equal to his interest (D) Amr invested LE 2000 cash for a one-quarter interest. Total capital after admission is to be LE 6000. (E) Amr invested LE 2000 cash for a one-quarter interest without recognizing any goodwill. (F) Amr invested LE 2000 cash for a 25% interest equal to his cash contribution. (G) Amr invested LE 2000 cash for a 25% interest recognizing a goodwill. (H) Amr invested an equipment valued at LE 2000. Amr is to acquire a 40% interest without recognizing any goodwill. (I) Amr invested an equipment valued at LE 2000. Amr is to acquire a 40% interest. Total capital after admission is to be LE 6000. (J) Amr invested LE 2000 cash for a 40% interest without decreasing capitals of old partners. (K) Amr invested LE 2000 cash for a 40% recognizing a goodwill. Solution(A) The required entry to record the admission of Amr who purchased 100% of Badr capital interest(LE):2004Jan. Badr, Capital Amr, capital (To record the admission of Amr) 30003000(B) The required entry to record the admission of Amr who invested LE 2000 cash for 1/3 capital interest (LE): Problem test: Capital interest to be acquired by Amr = 1/3 (3000 + 1000 + 2000) = 1/3 × 6000 = 2000 Less: investments by Amr (2000) Difference zero Therefore, no bonuses or goodwill will be given to any partner. 2004 Jan. Cash Amr, capital (To record the admission of Amr) 20002000(C) The same as "B". (G) The same as "F". (H) The required entry to record the admission of Amr who invested Equipment valued at LE 2000 for 40% capital interest (LE): Problem test: Capital interest to be acquired by Amr = 40% (3000 + 1000 + 2000) = 40% × 6000 = 2400 Less: investments by Amr (2000) Difference 400 Therefore, A bonus will be given to the new partner Amr. 2004 Jan. Equipment Badr, Capital (400 × 3/4) Bakr, Capital (400 × 1/4) Amr, capital (To record the admission of Amr under the bonus method) 20003001002400(I) The same as "H". (J) The required entry to record the admission of Amr who invested LE 2000 cash for 40% capital interest (LE): Problem test: Capital interest to be acquired by Amr = 40% (3000 + 1000 + 2000) = 40% × 6000 = 2400 Less: investments by Amr (2000) Difference 400 Therefore, goodwill will be recognized for the new partner Amr. Goodwill recognized for the new partner Amr = 400 ÷ 60% = 666. 2004 Jan. Jan. Goodwill Amr, Capital (to record goodwill recognized for the new partner Amr) Cash Amr, Capital (to record cash invested by Amr) 666.2000666.2000(K) The same as "J". What method may be used to record the admission of the new partner?There are three methods that can be used to account for a new partner joining the partnership: these are the exact method, the bonus method, and the goodwill method. Exact Accounting Method: Under this method, the investment made by the new partner equals the book value of the capital interest that they have purchased.
What are the steps to be followed in recording the formation of a partnership?You don't have to file any paperwork to establish a partnership -- you can create a partnership simply by agreeing to go into business with another person.. Choose a business name.. Register a fictitious business name.. Draft and sign a partnership agreement.. Comply with tax and regulatory requirements.. Obtain Insurance.. What is the bonus method in accounting?What is the Bonus Method? The bonus method is used to grant a new partner additional capital in a partnership when the person is adding goodwill or some other intangible asset to the partnership.
What is needed in order for a person to be admitted as a new partner to the partnership?As per the Partnership Act, 1932, a new partner can be admitted into the firm with the consent of all the existing partners, unless otherwise agreed upon.
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