Partnership

Chapter 1
Part (1)
 Chapter 4
Admission of a New partner

A new partner may join a partnership by one

of Two ways:
1- purchasing the interest of one or more existing partners
2- investing assets in the partnership

2- investing assets in the partnership

We have two methods:
Bonus method Goodwill method

Goodwill Method

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 Goodwill Method
No Goodwill GW to old partner
Fair value = book value Fair value > book value

A&B equity after admission

>
A&B equity before admission

Dr. Cr. Dr. Cr.

Cash Goodwill
C,capital A,capital
B,capital
Cash
C,capital

Fair value < book value

A&B equity after admission
<
A&B equity before admission
GW to
new Dr. Cr.
partner
Net assets
Goodwill
C,capital
Reduction
In Dr. Cr.
Assets
(Canceled) A,capital
B,capital
C,capital
Cash
C,capital

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  Steps of calculation GW method:
1- Fair value of the partnership (Total implied capital) =
New investment X % of capital interest (‫)مقلوب‬
2- Book value of the partnership (A and B equity) =
FMV - new investment
3- Goodwill = (A and B equity after admission) – (A and B equity before
admission)
4- Allocate GW

Case one : No Goodwill no Bonus

Example(1): Assume that C invests $40,000 for one-third interest in AB
partnership . A Capital 30,000 and B Capital $30,000
Required: Prepare the journal entry to record the admission of C (Using GW method)

Solution
1-
2-

Cash $40,000
C,Capital $40,000

Case Two : GW to old partners

Example(1): Assume that C invests $36,000 for one-third interest in AB
partnership . A Capital 30,000 and B Capital $30,000
Required: Prepare the journal entry to record the admission of C and balance sheet
(Using GW method)

Solution
1- Fair value of the partnership = 36,000 X 3/1 = 108,000
2- ( A and B equity after ad.) = 108,000 - 36,000 = 72,000

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3- GW = 72,000 – 60,000
4- Allocate GW to old partners
A=12000/2 = 6000 B=12000/2 = 6000

Goodwill $12,000
A,Capital $6,000
B,Capital $6,000

Cash $36,000
C,Capital $36,000

Example(2): C is admitted to A&B partnership for 25% of the equity and income
the paid $ 40,000 in cash . A&B Capital balance before admission third interest in AB
A Capital 35,000 and B Capital $25,000
Required: Prepare the journal entry to record the admission of C and balance sheet
(Using GW method)
Solution
1- Fair value of the partnership = 40,000 X 100/25 = 160,000
2- ( A and B equity after ad.) = 160,000 - 40,000 = 120,000
3- GW = 120,000 – (35,000 + 25,000) = 60,000
4- Allocate GW to old partners
A=60,000/2 = 30,000 B=60,000/2 = 30,000

Cash $40,000
Goodwill $60,000
C,Capital $40,000
A,Capital $30,000
B,Capital $30,000

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 Case three: GW to New partners
 Steps of calculation GW method:
1- Fair value of the partnership (Total implied capital) =
New investment X % of capital interest (‫)مقلوب‬
2- Book value of the partnership (A and B equity) =
FMV - new investment
3- Goodwill = (A and B equity after admission) – (A and B
equity before admission) = negative

5- Allocate GW = C,capital – new investment

Example(1): Assume that C invests $27,000 for one-third interest in AB
partnership . A Capital 30,000 and B Capital $30,000
Required: Prepare the journal entry to record the admission of C and balance sheet
(Using GW method)
Solution
1- Fair value of the partnership = 27,000 X 3/1 = 81,000
2- ( A and B equity) = 81,000 - 27,000 = 54,000
3- GW = 54,000 – 60,000 = - 6,000
4- C,capital ?! 30,000

5- Allocate GW to New partner = 30,000 – 27,000 = 3000

Cash $27,000
Goodwill $3,000
C,Capital $30,000

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Example(2): C is admitted to A&B partnership for 1/4 of the equity and income
the paid $ 15,000 in cash . A&B Capital balance before admission third interest in AB
A Capital 35,000 and B Capital $25,000
Required: Prepare the journal entry to record the admission of C and balance sheet
(Using GW method)
Solution
1- Fair value of the partnership = 15,000 X 4/1 = 60,000
2- ( A and B equity after ad.) = 60,000 - 15,000 = 45,000
3- GW = 45,000 – (35,000 + 25,000) 60,000 = -15,000!
4- C,capital = 20,000!

5- Allocate GW to new partner = 20,000 -15,000 = 5000

Cash $15,000
Goodwill $5,000
C,Capital $20,000

Example(3): C invest an entire business which has FMV $150,000 while

identifiable net assets = 120,000 to A&B partnership for 1/4 of the equity and income
the paid $ 15,000 in cash . A&B Capital balance before admission third interest in AB
A Capital 35,000 and B Capital $25,000
Required: Prepare the journal entry to record the admission of C and balance sheet
(Using GW method)
Solution
Net assets $120,000
Goodwill $30,000
C,Capital $150,000

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Very important notes

2-using either bonus or goodwill can results the same if two

conditions are met:
A-New partner`s interest in capital = his interest in profits and
losses.
B-old partners continue to share profits and losses using the
old ratio
Ex

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 General problems
Problem 1:

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Problem 2:

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Problem 3:

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Problem 4:

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