CHAPTER 9

Partnerships:
Admission,
retirement
and
dissolution

CONTENTS

9.1 Admission of a new partner

9.2 Retirement of a partner
9.3 Revaluation, determining goodwill, and
admission of new partner
9.4 Partnership dissolution
9.5 Partnership dissolution — ledger accounts
 CHAPTER 9: PARTNERSHIPS: ADMISSION, RETIREMENT AND DISSOLUTION 9.1

ADDITIONAL PROBLEMS
Problem 9.1 Admission of a new partner

Adam, Eve and Abel are partners in Suave Swimsuits. Profits and losses are shared in
the ratio of 5:3:2. On 1 July 2002, when their capital balances stood at $50 000, $25 000
and $30 000 respectively, they agree to admit Cain to the partnership.
Required:
Prepare the journal entry to record Cain’s admission to the partnership under each of
the following assumptions
1. Cain pays Eve $15 000 for 50% of her interest.
2. Cain pays Adam $10 000 and Abel $7500 for 25% of each of their interests.
3. Cain invests $20 000 cash in the partnership for a 10% interest.
4. Cain invests $20 000 cash in the partnership for a 20% interest.
5. Cain invests $45 000 cash in the partnership for a 30% interest.

Solution
SUAVE SWIMSUITS

1. Eve, Capital 12 500

Cain, Capital 12 500
2. Adam, Capital 12 500
Abel, Capital 7 500
Cain, Capital 20 000
3. Total net assets of new partnership $50 000 + $25 000 +
$30 000 + $20 000 = $125 000.
Cain contributes $20 000 for a 10% interest, therefore total capital
= $200 000 and total goodwill is $75 000
Goodwill 75 000
Adam, Capital 5/10 37 500
Eve, Capital 3/10 22 500
Abel, Capital 2/10 15 000
Cash at Bank 20 000
Cain, Capital 20 000
4. Assets contributed by existing partners $50 000 + $25 000 +
$30 000 = $105 000
Cain contributes $20 000 for a 20% interest.
$105 000 = 80% interest, therefore 100% = $105 000 × 5/4 = $131 250
Less $105 000 + $20 000 = 125 000
Goodwill = 6 250
Cash at Bank 20 000
Goodwill 6 250
Cain, Capital 26 250
5. Capital investment
$50 000 + $25 000 + $30 000 = $105 000 + $45 000 = $150 000
Cash at Bank 45 000
Cain, Capital 45 000
$150 000 x 0.3 = $45 000)

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 CHAPTER 9: PARTNERSHIPS: ADMISSION, RETIREMENT AND DISSOLUTION 9.2

Problem 9.2 Retirement of a partner

The 1 July 2003 statement of financial position of W-X-L Catering is shown below:

W-X-L CATERING
Statement of Financial Position
as at 1 July 2003

ASSETS
Cash at bank $ 67 500
Accounts receivable 37 500
Inventory 84 000
Property, plant and equipment 313 500
$502 500
LIABILITIES AND PARTNERS’ EQUITY
Accounts payable $ 52 500
Weston, Capital 225 000
Ward, Capital 135 000
Williams, Capital 90 000
$502 500

Weston, Ward and Williams share profits and losses in the ratio of 6:5:4. Williams
decides to retire from the partnership on 1 July 2003.
Required:
Prepare the journal entries to record the retirement of Williams under each of the
following independent assumptions:
1. Weston purchases Williams’s interest for $111 000.
2. Williams sells one-third of his interest to Weston for $37 500 and two-thirds to Ward
for $57 000.
3. Appraisals reveal that accounts receivable are overstated by $6000, inventory under-
stated by $7500 and equipment is understated by $15 000. These assets are revalued,
and Williams is given a promissory note equal to his revised capital account to cover
his retirement.
4. The partnership gives Williams $37 500 cash and plant valued at $67 500 for his
partnership interest.
5. The partnership gives Williams $60 000 cash.
6. Williams receives $60 000 cash and a $30 000 promissory note from the partnership
for his interest.

(continued)

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 CHAPTER 9: PARTNERSHIPS: ADMISSION, RETIREMENT AND DISSOLUTION 9.3

Solution
W-X-L CATERINGS
1. Williams, Capital 90 000
Weston, Capital 90 000
2. Williams, Capital 90 000
Weston, Capital 30 000
Ward, Capital 60 000
3. Inventory 7 500
Equipment 15 000
Allowance for doubtful debts 6 000
Valuation Adjustment Summary 16 500
Valuation Adjustment Summary 16 500
Weston, Capital (6/15) 6 600
Ward, Capital (5/15) 5 500
Williams, Capital (4/15) 4 400
Williams, Capital 94 400
Bills Payable 94 400
4. Fair value of assets paid to Williams = $105 000
Williams’s capital = $90 000
Williams’s share of goodwill = $15 000
= 4/15 of value of business
\ Total goodwill = $56 250
Goodwill 56 250
Weston, Capital (6/15) 22 500
Ward, Capital (5/15) 18 750
Williams, Capital (4/15) 15 000
Williams, Capital 105 000
Cash at Bank 37 500
Plant 67 500
5. Williams, Capital 90 000
Weston, Capital 6/11 × $30 000 16 364
Ward, Capital 5/11 × $30 000 13 636
Cash at Bank 60 000
6. Williams, Capital 90 000
Cash at Bank 60 000
Bills Payable 30 000

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 CHAPTER 9: PARTNERSHIPS: ADMISSION, RETIREMENT AND DISSOLUTION 9.4

Problem 9.3 Revaluation, determining goodwill, and

admission of new partner
The post-closing trial balance of Manette and LaForce at 30 June 2003 is set out below.

MANETTE AND LAFORCE

Post-Closing Trial Balance
as at 30 June 2003

Debit Credit

Cash at bank $ 24 000

Trade debtors 29 000
Inventory 30 000
Office equipment 33 000
Motor vehicles 27 600
Trade creditors $ 43 600
Manette, Capital 60 000
LaForce, Capital 40 000
$143 600 $143 600

The partners shared profits and losses 60:40 respectively. They agreed to admit
Defarge to the partnership as from 1 July 2001. She was to be entitled to one-sixth
share of the profits while Manette and LaForce were to share the remainder in the same
proportions as before.
Defarge was to contribute the assets of her business at the following valuations:
debtors $12 000 (subject to an allowance of 5% for doubtful debts); inventory $20 800;
and the goodwill of her business valued at $3000. Defarge’s capital in the new firm was
to be $40 000 and she was to bring in cash for any further contribution required.
The assets of Manette and LaForce were revalued as follows:
1. Inventory increased by $5000.
2. Office equipment and motor vehicles reduced by $3000 and $3600 respectively.
3. Allowance for doubtful debts created at 5% on trade debtors.
4. Goodwill raised to the full agreed value of $50 000.
It was agreed among the three partners that capitals in the new firm should be fixed in
proportion to the profit-sharing ratios using Defarge’s capital as the base and with
Manette and LaForce adjusting their capitals by cash payment or cash withdrawal.
Required:
A. Show necessary journal entries to record the above transactions.
B. Prepare the statement of financial position of the new firm as at 1 July 2003, after
all of the above arrangements have been completed.

(continued)

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 CHAPTER 9: PARTNERSHIPS: ADMISSION, RETIREMENT AND DISSOLUTION 9.5

Solution

MANETTE, LAFORCE AND DEFARGE

A. Inventory 5 000
Goodwill 50 000
Office Equipment 3 000
Motor Vehicles 3 600
Allowance for Doubtful Debts 1 450
Valuation Adjustment Summary 46 950
Valuation Adjustment Summary 46 950
Manette, Capital (6/10) 28 170
LaForce, Capital (4/10) 18 780
Debtors 2 000
Inventory 20 800
Goodwill 3 000
Cash at Bank 4 800
Defarge, Capital 40 000
Allowance for Doubtful Debts 600
Manette LaForce Defarge
New profit sharing ratio 3/6 2/6 1/6
New Capital balances $120 000 80 000 40 000
Old Capital 88 170 58 780 _____
Required contribution $31 830 21 220 -
Cash at Bank 53 050
Manette, Capital 31 830
LaForce, Capital 21 220

B.
MANETTE, LAFORCE AND DEFARGE
Statement of Financial Position
as at 1 July 2003
Partners' equity
Manette, Capital $120 000
LaForce, Capital 80 000
Defarge, Capital 40 000
240 000
Liabilities
Creditors 43 600
$283 600
Current assets
Cash at Bank $81 850
Debtors $41 000
Allowance for Doubtful Debts 2 050 38 950
Inventory 55 800 176 600
Non-current assets
Office Equipment 30 000
Motor Vehicles 24 000
Goodwill 53 000 107 000
$283 600

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 CHAPTER 9: PARTNERSHIPS: ADMISSION, RETIREMENT AND DISSOLUTION 9.6

Problem 9.4 Partnership dissolution

Brown, Blue and Black decide to dissolve their partnership on 15 April 2003. The state-
ment of financial position on that date is presented below. Profits and losses are shared
2:1:2.

BROWN, BLUE AND BLACK

Statement of Financial Position
as at 15 April 2003

ASSETS
Cash at bank $ 36 000
Accounts receivable $ 54 000
Allowance for doubtful debts (9 000) 45 000
Inventory 108 000
Equipment 288 000
Accumulated depreciation—equipment (54 000) 234 000
Building 1 440 000
Accumulated depreciation—building 180 000 1 260 000
Land 360 000
$2 043 000
LIABILITIES AND PARTNERS’ EQUITY
Accounts payable $ 90 000
Mortgage on building 1 080 000
Brown, Capital 315 000
Blue, Capital 108 000
Black, Capital 450 000
$2 043 000

Required:
A. Prepare the Realisation account to record sale of the assets as follows:
1. Sold the inventory for $72 000.
2. Collected $48 000 on accounts receivable and wrote off the remaining accounts.
3. Sold the equipment for $192 000.
4. Sold the building and the land for $1 200 000, the buyer taking over the mort-
gage on the building.
B. Prepare the journal entry to record the payment of accounts payable (in full).
C. Prepare the journal entry to allocate the gain or loss on realisation to the partners’
Capital accounts.
D. Prepare a statement of financial position after the entries for requirements A, B and
C are posted.
E. Prepare journal entries to record the distribution of the remaining cash to the
partners.

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 CHAPTER 9: PARTNERSHIPS: ADMISSION, RETIREMENT AND DISSOLUTION 9.7

Solution
A.
BROWN, BLUE AND BLACK

Realisation
Gross amount of non-cash Contra-asset accounts:
assets:
Accounts receivable 54 000 All. for doubtful debts 9 000
Inventory 108 000 Acc. depr. - equipment 54 000
Equipment 288 000 Acc. depr. - building 180 000
Building 1 440 000 Mortgage on building 1 080 000
Land 360 000 Assets realised:
Accounts receivable 48 000
Inventory 72 000
Equipment 192 000
Building and land 120 000
(1 200 000 - 1 080 000) -
Loss on realisation:
Brown : (40%) 198 000
Blue: (20%) 99 000
Black: (40%) 198 000 495 000
2 250 000 2 250 000

B.
Accounts Payable 90 000
Cash at Bank 90 000

C.
Brown, Capital 198 000
Blue, Capital 99 000
Black, Capital 198 000
Realisation 495 000

D.
BROWN, BLUE AND BLACK
Statement of Financial Position
(after realisation of assets)

Assets Liabilities and partners’ equity

Cash at Bank $378 000 Brown, Capital 117 000
Black, Capital 252 000
_______ Blue, Capital 9 000
$378 000 $378 000

E.
Brown, Capital 117 000
Blue, Capital 9 000
Black, Capital 252 000
Cash at Bank 378 000

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 CHAPTER 9: PARTNERSHIPS: ADMISSION, RETIREMENT AND DISSOLUTION 9.8

Problem 9.5 Partnership dissolution — ledger accounts

Hale and Shine decided to dissolve their partnership on 30 October 2003, at which date
their statement of financial position was as set out below. Profits and losses are shared
5:3.

HALE AND SHINE

Statement of Financial Position
as at 30 October 2003

ASSETS LIABILITIES AND PARTNERS’ EQUITY

Accounts receivable $ 81 750 Accounts payable $ 42 690
Inventory 134 250 Bank overdraft 53 865
Prepaid insurance 1 500 Hale, Retained profits 18 720
Telstra shares 11 250 Shine, Retained profits 5 100
Furniture and equipment 18 975 Hale, Capital 75 000
Motor vehicles 11 250 Shine, Capital 45 000
Hale, Advance $18 000
Plus: Accrued interest 600 18 600
$258 975 $258 975

On 15 November the proceeds from the sale of assets were:

Accounts receivable $ 86 400

Furniture and equipment 21 000
Motor vehicle 10 050
Inventory 127 500
Telstra shares 12 750
Refund of prepaid insurance 450

On the same date, accounts payable (including $800 omitted for sundry expenses)
were discharged for $42 600. The bank had charged interest on overdraft to date at final
settlement of $305. Realisation expenses of $3400 were paid and the bank account was
closed.
Required:
Prepare the Realisation account, the Cash at Bank and partners’ Capital accounts after
completion of the dissolution.

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 CHAPTER 9: PARTNERSHIPS: ADMISSION, RETIREMENT AND DISSOLUTION 9.9

Solution
HALE AND SHINE
Realisation
Carrying amount of assets: Proceeds of realisation:
Furniture and equipment 18 975 Accounts receivable 86 400
Motor vehicles 11 250 Furniture and equipment 21 000
Inventory 134 250 Motor vehicles 10 050
Telstra shares 11 250 Inventory 127 500
Accounts receivable 81 750 Telstra shares 12 750
Prepaid insurance 1 500 Insurance rebate 450
Extra sundry expenses 800 Discount on acc. payable 890
Realisation expenses 3 400 Share of loss: Hale (5/8 2 775)
Interest expense 305 Share of loss: Shine (3/8 1 665) 4 440
$263 480 $263 480

Cash at Bank
Proceeds of sale 258 150 Realisation expenses 3 400
Bank overdraft (+ interest of 54 170
$305)
Accounts payable 42 600
Hale, Advance (+ interest) 18 600
Payment to Hale 90 945
Payment to Shine 48 435
$258 150 $258 150

Hale, Capital
Share of loss 2 775 Balance 75 000
Cash 90 945 Transfer from retained profits 18 720
$93 720 $93 720

Shine, Capital
Share of loss 1 665 Balance 45 000
Cash 48 435 Transfer from retained profits 5 100
$50 100 $50 100

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