Chapter 15, Problem 15.15P

Withdrawal of a Partner under Various Alternatives
The partnership of Acc, Jack, and Spade has been in business for 25 years. On December 31, 20X5, Spade decided to retire. The partnership balance sheet reported the following capital balances for each partner at December 31, 20X5:

  

The partners allocate partnership income and loss in the ratio 20:30:50, respectively.

Required
Record Spade’s withdrawal under each of the following independent situations.

1. Jack acquired Spade’s capital interest for $150,000 in a personal transaction. Partnership assets were not revalued, and partnership goodwill was not recognized.
2. Assume the same facts as in part a except that partnership goodwill applicable to the entire business was recognized by the partnership.
3. Spade received $180,000 of partnership cash upon retirement. Capital of the partnership after Spade’s retirement was $290,000.
4. Spade received $60,000 of cash and partnership land with a fair value of $120,000. The carrying amount of the land on the partnership books was $100,000. Capital of the partnership after Spade’s retirement was $310,000.
5. Spade received $150,000 of partnership cash upon retirement. The partnership recorded the portion of goodwill attributable to Spade.
6. Assume the same facts as in part e except that partnership goodwill attributable to all partners was recorded.
7. Because of limited cash n the partnership, Spade received land with a fair value of $100,000 and a partnership note payable for $50,000. The land’s carrying amount on the partnership books was $60,000. Capital of the partnership after Spade’s retirement was $360,000.

To determine

Disassociation of a partner: when a partner withdraws or retire from a partnership, that partner is disassociated from the partnership. In most cases the partnership purchases the disassociated partner’s interest in the partnership for a buyout price. Section 701 of UPA 1997 states that the buyout price is the estimated amount if, the partnership assets were sold at a price equal to the higher of the liquidation value or the value based on a sale of entire business as a going concern without the disassociated partner and the partnership was wound up and all partnership obligations settled. The partnership must pay interest to the disassociated partner from the date of disassociation to date of payment.

Requirement 1

The entry when J acquired S capital interest for $150,000 no assets were revalued.

Answer to Problem 15.15P

	Debit	Credit
S Capital Account	120,000
J Capital Account		120,000

Explanation of Solution

J acquired S interest in a personal transaction as no assets were revalued the excess amount is treated as personal transaction, hence will not be recognized. Only the S capital balance will be transferred to J.

To determine

Disassociation of a partner: when a partner withdraws or retire from a partnership, that partner is disassociated from the partnership. In most cases the partnership purchases the disassociated partner’s interest in the partnership for a buyout price. Section 701 of UPA 1997 states that the buyout price is the estimated amount if, the partnership assets were sold at a price equal to the higher of the liquidation value or the value based on a sale of entire business as a going concern without the disassociated partner and the partnership was wound up and all partnership obligations settled. The partnership must pay interest to the disassociated partner from the date of disassociation to date of payment.

Requirement 2

The entry when J acquired S capital interest for $150,000 no assets were revalued but goodwill is recogized.

Answer to Problem 15.15P

	Debit	Credit
Goodwill	60,000
A’s capital		12,000
J’s capital		18,000
S’s capital		30,000
S capital	150,000
J capital		150,000

Explanation of Solution

Valuation of goodwill:

	Amount $
Amount Paid by J for S capital	150,000
Less: S capital interest	(120,000)
Goodwill attributed to S	30,000

Implied value of goodwill:

As S share of profit and loss is 50%

Implied value of total goodwill will be $30,000 / .50  =

$60,000

A’s share of goodwill    $60,000 x .20  =

$12,000

J’s share of goodwill   $60,000 x .30  =

$18,000

S capital will be debited with $150,000($120,000 + 30,000).

To determine

Disassociation of a partner: when a partner withdraws or retire from a partnership, that partner is disassociated from the partnership. In most cases the partnership purchases the disassociated partner’s interest in the partnership for a buyout price. Section 701 of UPA 1997 states that the buyout price is the estimated amount if, the partnership assets were sold at a price equal to the higher of the liquidation value or the value based on a sale of entire business as a going concern without the disassociated partner and the partnership was wound up and all partnership obligations settled. The partnership must pay interest to the disassociated partner from the date of disassociation to date of payment.

Requirement 3

The entry when S received $180,000 upon retirement. Capital of partnership after S retirement is 290,000.

Answer to Problem 15.15P

	Debit	Credit
S capital	180,000
A’s capital	24,000
J’s capital	36,000
Cash		180,000

Explanation of Solution

Calculation of bonus paid to S

	Amount $
Amount paid to S, on retirement	180,000
Less: S capital interest	(120,000)
Bonus paid − to be allocated to A and J in 40:60 ratio	60,000

Allocation of bonus:

60,000 x .40

= 24,000

60,000 x .60

= 36,000

Capital balance after retirement

	Amount $
A’s capital account ($150,000 − 24,000)	126,000
J’s capital account ($150,000 - $36,000)	164,000
Total capital	290,000

To determine

Disassociation of a partner: when a partner withdraws or retire from a partnership, that partner is disassociated from the partnership. In most cases the partnership purchases the disassociated partner’s interest in the partnership for a buyout price. Section 701 of UPA 1997 states that the buyout price is the estimated amount if, the partnership assets were sold at a price equal to the higher of the liquidation value or the value based on a sale of entire business as a going concern without the disassociated partner and the partnership was wound up and all partnership obligations settled. The partnership must pay interest to the disassociated partner from the date of disassociation to date of payment.

Requirement 4

The entry when S received $60,000 of cash and partnership land with fair value of $120,000. The carrying amount of land is $100,000. Capital after S retirement was $310,000

Answer to Problem 15.15P

	Debit	Credit
Land revaluation entry
Land	20,000
A capital ($20,000 x .20)		4,000
J’s capital ($20,000 x .30)		6,000
S’s capital ($20,000 x .50)		10,000
S capital	130,000
A capital	20,000
J capital	30,000
Cash		60,000
Land		120,000

Explanation of Solution

Calculation of bonus to S

	A	J	S
Profit ratio	20%	`30%	50%
Capital balance before S retirement	$150,000	200,000	120,000
Gain recognized on transfer of land	4,000	6,000	10,000
Capital balance	154,000	206,000	130,000

	S
Amount paid to S 60,000 + 120,000	180,000
S capital interest after revaluation of land	(130,000)
Bonus	50,000

A’s share of bonus to S $20,000 ($50,000 x .40)

J’s share of bonus to S $30,000 ($50,000 x.60)

Balance of capital after retirement:

	S
A’s capital ($154,000 - $20,000)	134,000
J’s capital ($206,000 - $30,000)	176,000
Total capital	310,000

To determine

Disassociation of a partner: when a partner withdraws or retire from a partnership, that partner is disassociated from the partnership. In most cases the partnership purchases the disassociated partner’s interest in the partnership for a buyout price. Section 701 of UPA 1997 states that the buyout price is the estimated amount if, the partnership assets were sold at a price equal to the higher of the liquidation value or the value based on a sale of entire business as a going concern without the disassociated partner and the partnership was wound up and all partnership obligations settled. The partnership must pay interest to the disassociated partner from the date of disassociation to date of payment.

Requirement 5

The entry when S received $150,000 cash and partnership recorded portion of goodwill attributable to S

Answer to Problem 15.15P

	Debit	Credit
S capital	120,000
Goodwill	30,000
Cash		150,000

Explanation of Solution

Valuation of goodwill:

	Amount $
Amount Paid to S	150,000
Less: S capital interest	(120,000)
Goodwill attributed to S	30,000

Amount of goodwill debited to S capital and cash paid to S credited

To determine

Disassociation of a partner: when a partner withdraws or retire from a partnership, that partner is disassociated from the partnership. In most cases the partnership purchases the disassociated partner’s interest in the partnership for a buyout price. Section 701 of UPA 1997 states that the buyout price is the estimated amount if, the partnership assets were sold at a price equal to the higher of the liquidation value or the value based on a sale of entire business as a going concern without the disassociated partner and the partnership was wound up and all partnership obligations settled. The partnership must pay interest to the disassociated partner from the date of disassociation to date of payment.

Requirement 6

The entry when S was given $150,000 goodwill applicable to entire business was recorded.

Answer to Problem 15.15P

	Debit	Credit
Goodwill	60,000
A’s capital		12,000
J’s capital		18,000
S’s capital		30,000
S capital	150,000
J capital		150,000

Explanation of Solution

Valuation of goodwill:

	Amount $
Amount Paid by J for S capital	150,000
Less: S capital interest	(120,000)
Goodwill attributed to S	30,000

Implied value of goodwill:

As S share of profit and loss is 50%

Implied value of total goodwill will be $30,000 / .50  =

$60,000

A’s share of goodwill    $60,000 x .20  =

$12,000

J’s share of goodwill   $60,000 x .30  =

$18,000

S capital will be debited with $150,000($120,000 + 30,000).

To determine

Disassociation of a partner: when a partner withdraws or retire from a partnership, that partner is disassociated from the partnership. In most cases the partnership purchases the disassociated partner’s interest in the partnership for a buyout price. Section 701 of UPA 1997 states that the buyout price is the estimated amount if, the partnership assets were sold at a price equal to the higher of the liquidation value or the value based on a sale of entire business as a going concern without the disassociated partner and the partnership was wound up and all partnership obligations settled. The partnership must pay interest to the disassociated partner from the date of disassociation to date of payment.

Requirement 7

The entry when S received land at fair value of $100,000 and notes payable of $50,000. Carrying amount of land was $60,000. Capital after S retirement was $360,000

Answer to Problem 15.15P

	Debit	Credit
Land	40,000
A’s capital ($40,000 x .20)		8,000
J’s capital ($40,000 x .30)		12,000
S’s capital ($40,000 x .50)		20,000
S capital	140,000
A capital ($10,000 x .40)	4,000
J capital ($10,000 x 60)	6,000
Land		100,000
Notes payable		50,000

Explanation of Solution

Calculation of bonus paid to S

	A	J	S
Profit ratio	20%	`30%	50%
Capital balance before S retirement	150,000	200,000	120,000
Allocation of gain on transfer of land	8,000	12,000	20,000
Capital balance	158,000	212,000	140,000

Bonus paid to S $10,000 (150,000 − 140,000)

Capital balance after S retirement

	Amount $
A’s capital ($158,000 − 4,000)	154,000
J’s capital (212,000 − 6,000)	206,000
Total capital	360,000