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Withdrawal of a Partner

Overview
A partner may withdraw from a partnership voluntarily by selling their equity in the
firm. They may also withdraw involuntarily by reaching mandatory retirement age, by
expulsion, or by dying. The withdrawal of a partner legally dissolves the partnership.
However, it is necessary to record the economic effects of the partners withdrawal.

The withdrawal may be done by a payment from partners personal assets or a


payment from partnership assets. Payment from personal assets affects only the
partners capital accounts, not total capital. Payment from partnership assets decreases
the total net assets and total capital of the partnership.

After the partner has withdrawn, income ratios for remaining partners must be
reviewed and specified again. If a new income ratio is not indicated in the partnership
agreement, the remaining partners are assumed to share income and losses equally.

Payment from Partners Personal Assets


A withdrawal by payment from personal assets is a personal transaction between
the partners. Payment to the departing partner is made directly from the remaining
partners personal assets. Partnership assets are not involved in any way and total
capital does not change. The effect on the partnership is limited to a transfer of the
partners capital balances.
Example

Assume John Mayer, James Paige , and Bruce Springsteen have capital balances of
$25,000, $15,000 and $10,000. The partnership equity totals $50,000. Mayer and Paige
agree to buy out Springsteens interest. Each agrees to pay Springsteen $8,000 in
exchange for one-half of his total interest of $10,000 on February 1 st. The entry to
record the withdrawal is as follows:

Feb. 1 B. Springsteen, Capital

$10,000

J. Mayer, Capital

$5,000

J. Paige, Capital

5,000

-to record purchase of Springsteens interest by other partners

Net assets of $50,000 remain the same and total partnership capital is also unchanged
at $50,000 ($30,000+ $20,000+ $0). All that has happened is a simple relocation of
capital amounts. Note that the $16,000 paid to Springsteen personally is not recorded.
His capital is debited for $10,000, not the $16,000 he received. Similarly, Paige and
Mayer credit their capital accounts for only $5,000, not the $8,000 they each paid.

Payment from Partnership Assets


When this occurs both the partnership net assets and capital is decreased.
Using partnership assets to pay for a withdrawing partners interest is the opposite
of admitting a partner through the investment of assets into the partnership.
In accounting for a withdrawal by payment from partnership assets, asset
revaluations should not be recorded. Recording this to the fair market value of the
assets at the time of the withdrawal violates the cost principle, and the going
concern assumption.
Example: Assume that instead of Ryan Karns interest being purchased personally
by the other partners, it is bought out by the partnership.

Entry: DR

R. Karn, Capital

CR

10 000

Cash

10

000
To record purchase of Karns interest by partnership.
Both the net assets and total partnership capital decrease by $20 000.
The following effect would be:

C. Shantz, Capital
Bal. 25 000

B. Daudlin, Capital

R. Karn, Capital

Bal. 15 000

Bal. 10 000
10 000
Bal. 0

The before and after effects of the withdrawal of a partner when payment is made
from personal assets or from partnership assets are shown by the comparison:

Before Withdrawal
partnership assets

Payment from partners personal assets

Net Assets
$50000
$40000
Partners Capital
C.Shantz
$25000
$25000
B.Daudlin
$15000
$15000
R.Karn
$10000
$0
Total Capital $50000
$40000

Payment from

$50000

$30000
$20000
$0
$50000

It is rare for the partnership to pay the exact amount of the capital account balance.
When the payments are not the same, the difference between the amount paid and
the withdrawing partners capital balance is considered to be a bonus to either the
departing or remaining partners.

Withdrawal of a partner
Bonus to Departing Partner
A bonus may be paid to a departing partner in any of these situations

The fair market value of partnership assets is more than their net book value

There is unrecorded goodwill resulting from the partnerships superior earning record

The remaining partners are anxious to remove the partner from their firm

The bonus is deducted from the remaining partners capital balances based on their income
ratios at the time of the withdrawal.
Start by determining the amount of the bonus by subtracting the leaving partners capital
from the cash they received during their departure. Then the payment of said bonus must
be allocated considering the other partners income ratios.
The journal entry to record the withdrawal will have a debit to the capital account of the
leaving partner for the full amount. A debit to the remaining partners capital accounts
depending on how much they paid out for the bonus and a credit to the cash account for the
full amount paid to the departing partner.
Both net assets and total capital will decrease when a partner is withdrawn in order to
purchase their equity, and the bonus will be allocated from the remaining partners equity.
Example:
The capital balances for partners are as follows: R.Romero, $50,000; B,Lawrie, $30,000
and S.Santos, $20,000. The partners share and income ratio of 3:2:1 respectively. Santos
leaves the company and receives a cash payment of $25,000 from the firm. The bonus is
calculated as follows:
$25,000-$20,000=$5000
R.Romero($5000 x )
3000
B.Lawrie ($5000 x )
2000
Total bonus
5000

Journal entry
Mar.1

S.Santos, Capital
20,000
R.Romero, Capital
3,000
B.Lawrie, Capital
2,000
Cash
25,000
To record the withdrawal of and bonus to, Santos

Before the withdrawal of the partner the 3 capitals together add to $100,000 as the total
assets. After the withdrawal they lost in both total capital and net assets in order to buy out
the leaving partners capital.

Bonus To Remaining Partners:


Happens when:
- Recorded assets are overvalued.
- The partnership has a poor earnings record.
- The partner is anxious to leave the partnership.
The bonus will be allocated (credited) to the capital accounts of the remaining partners
based on their income ratios.
Example:
Susan has a $20,000 equity and she wants to leave the partnership she has with Tom and
Andy. When she leaves on May 1st she is only paid $16,000 of her equity. In that case, the
calculations are:
1. Determine the amount of the bonus. Subtract the departing partners capital balance from
the cash paid by the partnership.
Bonus = $16,000 - $20,000
= $4,000
2. Allocate the bonus to the remaining partners. Tom and Andy share an income ratio of 3:2
To Tom: $4,000 x 3 / 5 = $2,400
To Andy: $4,000 x 2 / 5 = $1,600
The journal entry:
May 1st Susan, Capital

20,000

Tom, Capital
2,400
Andy, Capital
1,600
Cash
16,000
To record withdrawal of Susan and bonuses to remaining partners
Death of a Partner:
The death of a partner dissolves the partnership. But generally an agreement is made up for
the surviving partners to continue operations.
When a partner dies, the partners equity at the date of his / her death has to be
determined. This is done by:
1) Calculating the Net Income or Loss for the YTD
2) Closing the books
3) Preparing the financial statements
Death of the partner may be recorded by either of the two methods described in the section
for the withdrawal of a partner: 1) payment from the partners personal assets or 2) payment
from the partnerships assets.
One or more of the surviving partners may agree to use his or her personal assets to
purchase the deceased partners equity. Or partnership assets may be used to settle with
the deceased partners estate.
For easier payment for the partners assets, many partnerships obtain life insurance policies
on each partner. The partnership is named as the beneficiary. The proceeds from the
insurance are then used to settle with the estates.

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