The document discusses various aspects of partnership accounting for admission, withdrawal, and liquidation of partners under US GAAP. It provides examples of partners purchasing interests, investing assets, receiving bonuses, withdrawing from partnerships, dealing with capital deficiencies upon liquidation, and the global similarities and differences between US GAAP and IFRS for partnership accounting.

1. 12 - 1
Admission and Withdrawal of Partners
 When the makeup of the partnership changes,
the existing partnership is dissolved.
 A new partnership may be immediately
formed.
 New partner acquires partnership interest by:
1. Purchasing it from the other partners, or
2. Investing assets in the partnership.
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2. 12 - 2
Purchase of Partnership Interest
 A new partner can purchaseA new partner can purchase
partnership interest directly frompartnership interest directly from
the existing partners.the existing partners.
The cash goes to the partners, notThe cash goes to the partners, not
to the partnership.to the partnership.
 To become a partner, the newTo become a partner, the new
partner must be accepted by thepartner must be accepted by the
current partners.current partners.
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3. 12 - 3
Purchase of Partnership Interest
On January 4th
, Hector Perez sells one-half of his
partnership interest to Tyrell Rasheed for $18,000. Perez
gives up a $13,000 recorded interest in the partnership.
Zayn Perez Rasheed Total
Capital balances before new partner 52,000$ 26,000$ -$ 78,000$
Allocation to new partner (13,000) 13,000 -
Capital balances after new partner 52,000$ 13,000$ 13,000$ 78,000$
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4. 12 - 4
Investing Assets in a Partnership
 The new partner can gain
partnership interest by
contributing assets to the
partnership.
 The new assets will increase
the partnership’s net assets.
 After admission, both assets
and equity will increase.
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5. 12 - 5
Investing Assets in a Partnership
On January 4th
, Tyrell Rasheed is admitted to the
partnership with a payment of $22,000 cash.
Zayn Perez Rasheed Total
Capital balances before new partner 52,000$ 26,000$ -$ 78,000$
Allocation to new partner 22,000 22,000
Capital balances after new partner 52,000$ 26,000$ 22,000$ 100,000$
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6. 12 - 6
Bonus to Old or New Partners
Bonus to Old
Partners
Bonus to Old
Partners
When the current value of a
partnership is greater than the
recorded amounts of equity, the old
partners usually require a new partner
to pay a bonus when joining.
When the current value of a
partnership is greater than the
recorded amounts of equity, the old
partners usually require a new partner
to pay a bonus when joining.
Bonus to New
Partners
Bonus to New
Partners
The partnership may grant a bonus to
a new partner if the business is in
need of cash or if the new partner has
exceptional talents.
The partnership may grant a bonus to
a new partner if the business is in
need of cash or if the new partner has
exceptional talents.
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7. 12 - 7
Bonus to Old Partners
On January 4th
, Zayn and Perez agree to accept Rasheed
as a partner upon his investment of $42,000 cash in the
partnership. Rasheed is to receive a 25% ownership interest
in the new partnership. Any bonus is attributable to the
existing partners and is shared equally.
78,000$
42,000
120,000
25%
30,000$Rasheed's equity balance
Equity of Zayn and Perez
Total partnership equity
Rasheed's ownership percent
Investment by Rasheed
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8. 12 - 8
Bonus to Old Partners
On January 4th
, Zayn and Perez agree to accept Rasheed
as a partner upon his investment of $42,000 cash in the
partnership. Rasheed is to receive a 25% ownership interest
in the new partnership. Any bonus is attributable to the
existing partners and is shared equally.
$42,000 - $30,000 = $12,000 × ½ = $6,000$42,000 - $30,000 = $12,000 × ½ = $6,000
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9. 12 - 9
Bonus to New Partner
78,000$
18,000
96,000
25%
24,000$Rasheed's equity balance
Equity of Zayn and Perez
Total partnership equity
Rasheed's ownership percent
Investment by Rasheed
On January 4th
, Zayn and Perez agree to accept
Rasheed as a partner upon his investment of $18,000
cash in the partnership. Rasheed is to receive a 25%
ownership interest in the new partnership. Any bonus is
attributable to Rasheed’s excellent business skills.
On January 4th
, Zayn and Perez agree to accept
Rasheed as a partner upon his investment of $18,000
cash in the partnership. Rasheed is to receive a 25%
ownership interest in the new partnership. Any bonus is
attributable to Rasheed’s excellent business skills.
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10. 12 - 10
Bonus to New Partner
On January 4th
, Zayn and Perez agree to accept
Rasheed as a partner upon his investment of $18,000
cash in the partnership. Rasheed is to receive a 25%
ownership interest in the new partnership. Any bonus is
attributable to Rasheed’s excellent business skills.
On January 4th
, Zayn and Perez agree to accept
Rasheed as a partner upon his investment of $18,000
cash in the partnership. Rasheed is to receive a 25%
ownership interest in the new partnership. Any bonus is
attributable to Rasheed’s excellent business skills.
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$18,000 - $24,000 = ($6,000) × ½ = ($3,000)$18,000 - $24,000 = ($6,000) × ½ = ($3,000)

11. 12 - 11
Withdrawal of a Partner
A partner can withdrawA partner can withdraw
in two ways:in two ways:
 The partner can sell his/herThe partner can sell his/her
partnership interest topartnership interest to
another person.another person.
 The partnership canThe partnership can
distribute cash and/or otherdistribute cash and/or other
assets to the withdrawingassets to the withdrawing
partner.partner.
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12. 12 - 12
Withdrawal of a Partner
At the date of the withdrawal of Perez, the partners have the following
capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed -
$38,000. The partners share income and loss equally. Perez is to receive
$38,000 cash upon withdrawal from the partnership.
At the date of the withdrawal of Perez, the partners have the following
capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed -
$38,000. The partners share income and loss equally. Perez is to receive
$38,000 cash upon withdrawal from the partnership.
No BonusNo Bonus
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13. 12 - 13
Withdrawal of a Partner
At the date of the withdrawal of Perez, the partners have the following
capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed -
$38,000. The partners share income and loss equally. Perez is to receive
$34,000 cash upon withdrawal from the partnership.
At the date of the withdrawal of Perez, the partners have the following
capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed -
$38,000. The partners share income and loss equally. Perez is to receive
$34,000 cash upon withdrawal from the partnership.
Bonus to Remaining PartnersBonus to Remaining Partners
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Capital balance $ 38,000
Cash settlement 34,000
Bonus 4,000
Times 50%
Bonus to each partner $ 2,000

14. 12 - 14
Capital balance $ 38,000
Cash settlement 40,000
Deficiency 2,000
Times 50%
To each partner $ 1,000
Withdrawal of a Partner
At the date of the withdrawal of Perez, the partners have the following
capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed -
$38,000. The partners share income and loss equally. Perez is to receive
$40,000 cash upon withdrawal from the partnership.
At the date of the withdrawal of Perez, the partners have the following
capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed -
$38,000. The partners share income and loss equally. Perez is to receive
$40,000 cash upon withdrawal from the partnership.
Bonus to Withdrawing PartnerBonus to Withdrawing Partner
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15. 12 - 15
Death of a Partner
A partner’s death dissolves a partnership. A deceasedA partner’s death dissolves a partnership. A deceased
partner’s estate is entitled to receive his or her equity. Thepartner’s estate is entitled to receive his or her equity. The
partnership agreement should contain provisions forpartnership agreement should contain provisions for
settlement. These provisions usually require:settlement. These provisions usually require:
1.1.Closing the books to determine income or loss since theClosing the books to determine income or loss since the
end of the previous period, andend of the previous period, and
2.2.Determining and recording current market values for bothDetermining and recording current market values for both
assets and liabilities.assets and liabilities.
Settlement of the deceased partner’s estate can involveSettlement of the deceased partner’s estate can involve
selling the equity to remaining partners or to an outsider, orselling the equity to remaining partners or to an outsider, or
it can involve withdrawal of assets.it can involve withdrawal of assets.
A partner’s death dissolves a partnership. A deceasedA partner’s death dissolves a partnership. A deceased
partner’s estate is entitled to receive his or her equity. Thepartner’s estate is entitled to receive his or her equity. The
partnership agreement should contain provisions forpartnership agreement should contain provisions for
settlement. These provisions usually require:settlement. These provisions usually require:
1.1.Closing the books to determine income or loss since theClosing the books to determine income or loss since the
end of the previous period, andend of the previous period, and
2.2.Determining and recording current market values for bothDetermining and recording current market values for both
assets and liabilities.assets and liabilities.
Settlement of the deceased partner’s estate can involveSettlement of the deceased partner’s estate can involve
selling the equity to remaining partners or to an outsider, orselling the equity to remaining partners or to an outsider, or
it can involve withdrawal of assets.it can involve withdrawal of assets.
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16. 12 - 16
Liquidation of a Partnership
A partnership dissolution requires four steps:
 Noncash assets are sold for cash and a gain or
loss on liquidations is recorded.
 Gain or loss on liquidation is allocated to partners
using their income-and-loss ratio.
 Liabilities are paid or settled.
 Any remaining cash is distributed to partners based
on their capital balances.
A partnership dissolution requires four steps:
 Noncash assets are sold for cash and a gain or
loss on liquidations is recorded.
 Gain or loss on liquidation is allocated to partners
using their income-and-loss ratio.
 Liabilities are paid or settled.
 Any remaining cash is distributed to partners based
on their capital balances.
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17. 12 - 17
No Capital Deficiency
No capital deficiency means that all partners have a zero or
credit balance in their capital accounts.
No capital deficiency means that all partners have a zero or
credit balance in their capital accounts.
Zayn, Perez and Rasheed agree to dissolve their partnership.
The only outstanding liability is an account payable of $20,000. Prior to
dissolution the partnership has the following balance sheet:
Zayn, Perez and Rasheed agree to dissolve their partnership.
The only outstanding liability is an account payable of $20,000. Prior to
dissolution the partnership has the following balance sheet:
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Cash 178,000$ Accounts payable 20,000$
Land 40,000 K. Zayn, Capital 70,000
H. Perez, Capital 66,000
T. Rasheed, Capital 62,000
218,000$ 218,000$
BOARDS'
Balance Sheet
At January 15, 2011

18. 12 - 18
No Capital Deficiency
BOARDS’ begins the dissolution process by selling the land for $46,000
cash. The gain on the sale of the land is distributed equally among the
partners. After the sale of the land the company pays the account payable.
BOARDS’ begins the dissolution process by selling the land for $46,000
cash. The gain on the sale of the land is distributed equally among the
partners. After the sale of the land the company pays the account payable.
P 4
Jan. 15 Cash 46,000
Land 40,000
K. Zayn, Capital 2,000
H. Perez, Capital 2,000
T. Rasheed, Capital 2,000
To record sale of land.
Jan. 15 Accounts payable 20,000
Cash 20,000
To record payment of accounts payable.

19. 12 - 19
No Capital Deficiency
After the sale of land for a gain and the payment of the company’s
accounts payable, BOARDS’ has the following balance sheet:
After the sale of land for a gain and the payment of the company’s
accounts payable, BOARDS’ has the following balance sheet:
P 4
Accounts payable -$
Cash 204,000$ K. Zayn, Capital 72,000$
H. Perez, Capital 68,000
T. Rasheed, Capital 64,000
204,000$ 204,000$
BOARDS'
Balance Sheet
At January 15, 2011

20. 12 - 20
Capital Deficiency
Capital deficiencyCapital deficiency means that at least one partnermeans that at least one partner
has a debit balance in his or her capital account athas a debit balance in his or her capital account at
the point of final cash distribution. This can arise fromthe point of final cash distribution. This can arise from
liquidation losses, excessive withdrawals beforeliquidation losses, excessive withdrawals before
liquidation, or recurring losses in prior periods. Aliquidation, or recurring losses in prior periods. A
partner with a capital deficiency must, if possible,partner with a capital deficiency must, if possible,
cover the deficit by paying cash into the partnership.cover the deficit by paying cash into the partnership.
Capital deficiencyCapital deficiency means that at least one partnermeans that at least one partner
has a debit balance in his or her capital account athas a debit balance in his or her capital account at
the point of final cash distribution. This can arise fromthe point of final cash distribution. This can arise from
liquidation losses, excessive withdrawals beforeliquidation losses, excessive withdrawals before
liquidation, or recurring losses in prior periods. Aliquidation, or recurring losses in prior periods. A
partner with a capital deficiency must, if possible,partner with a capital deficiency must, if possible,
cover the deficit by paying cash into the partnership.cover the deficit by paying cash into the partnership.
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21. 12 - 21
Capital Deficiency
Zayn, Perez, and Rasheed agree to dissolve their partnership.
Prior to the final distribution of cash to the partners, Zayn has a capital
balance of $19,000, Perez $8,000, and Rasheed ($3,000). Rasheed owes
the partnership $3,000 and is able to pay the amount.
Zayn, Perez, and Rasheed agree to dissolve their partnership.
Prior to the final distribution of cash to the partners, Zayn has a capital
balance of $19,000, Perez $8,000, and Rasheed ($3,000). Rasheed owes
the partnership $3,000 and is able to pay the amount.
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22. 12 - 22
Partner Cannot Pay Deficiency
Zayn Perez Rasheed Total
Ending capital balances 19,000$ 8,000$ (3,000)$ 24,000$
Allocation of $3,000 deficiency (1,500) (1,500) 3,000 -
Capital balances for dissolution 17,500 6,500 - 24,000
Let’s use the information from our previous example of a capital deficiency
and assume partners divide profit and losses equally.
Let’s use the information from our previous example of a capital deficiency
and assume partners divide profit and losses equally.
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23. 12 - 23
Global View
Partnership accounting according to U. S. GAAP is similar, but
not identical, to that under IFRS.
1.Both U. S. GAAP and IFRS include broad and similar
guidance for partnership accounting. Partnership organization
is similar worldwide, however, different legal systems dictate
different implications and motivations for how a partnership is
effectively set up.
2.The account for partnership admission, withdrawal, and
liquidation is likewise similar worldwide. However, different
legal systems impact partnership agreements and their
implication to the parties.
Partnership accounting according to U. S. GAAP is similar, but
not identical, to that under IFRS.
1.Both U. S. GAAP and IFRS include broad and similar
guidance for partnership accounting. Partnership organization
is similar worldwide, however, different legal systems dictate
different implications and motivations for how a partnership is
effectively set up.
2.The account for partnership admission, withdrawal, and
liquidation is likewise similar worldwide. However, different
legal systems impact partnership agreements and their
implication to the parties.

24. 12 - 24
Partner Return on Equity
Partner return
on equity
Partner net income
Average partner equity
=
Total LP I LP II Celtics LP
Balance, Beginning of year 85$ 122$ (307)$ 270$
Net income (loss) for year 216 44 61 111
Cash distribution (48) - - (48)
Balance, End of year 253$ 166$ (246)$ 333$
Partner return on equity 128% 31% NA 37%
Boston Celtics
216/[(85+253)/2] = 128%
A 1

25. 12 - 25
End of Chapter 12