Partnership

Group Members
Syed Muhammad Hamza (31)
 Abdul Khaliq (43)
 Hassaan Tariq (28)
 Zeeshan Islam (40)
 Ayeman Malik (14)
Fizza (30)
Huma (48)

Types of Business.
Sole
proprietorship.
Partnership.
Corporation.

Opening
partnership
accounts.
Closing
entries.
Division of
net income.
Admission
of new
partner.
Liquidation.
Retirement
of old
partner.
Death of a
partner
Contents.
Introduction

Definition of Partnership.
Partnership act 1932, defines partnership as:
“The relationship between persons who have
agreed to share the profit and loss of a
business carried on by all or any of them acting
for all”

Limit of Membership.
 In Banking Business.
In banking business of partnership the minimum no of
partners are 2 and maximum number of partners are
10.
 In any other business.
In any other form of partnership firm tth minimum number of
partners are 2 and the maximum number of partners are 20.

Partnerships?
• No written agreement is required but
agreement is recommended.

Partnership Deed.
• “An agreement among the partners which sets
at the terms on which they were agree to form a
partnership is called partnership deed”
 Amount of Capital to be invested
 How profits and losses should be shared
 Amount of drawings allowed
 Interest on Capital
 Interest on drawings
 Salary agreements

Types of partnership and types of
Limited
partnership.
General partner.
(at least one)
Limited partner.
(one or more)
General
partnership.
General
partners.
(all partners are
general)
partners.

Kinds of Partners.
Junior
partner.
Nominal
partner.
Holding out
partner.
Senior
partner.
Sleeping
partner.
Quasi
partner.
Minor
partner.
Active
partner.
Solvent partner.

• If partners are not allowed to
change their capitals during the
business life except in extra
ordinary cases,is called fixed
capital
Fixed Capital.
•If partners are allowed to change
their capital during the business
life with each transactions ,is
called fluctuating capital.
Fluctuating capital.

CHARACTERISTICS OF PARTNERSHIPS
Principal characteristics of a partnership
1 Association of individuals
2 Mutual agency
3 Limited life
4 Unlimited liability
5 Co-ownership of property

Mutual Agency.
Collective decision.
Each partner works as an agent of the firm.
Can enter in contracts.
Right to take part in management.
Right to give the openion.

CO-OWNERSHIP OF PROPERTY
• Partnership Assets
Assets invested in the partnership are owned jointly by
all the partners.
If a partner invests building or any other propert he
or she does retain any personal right to the assets
contributed.The property becomes jointly owned by
all partners.

Limited Life
Admission of new partner.
Withdrawal of old partner
Bankrupt case.
Expiration of the period of time.
Complition of the project.

Unlimited Liability
Each partner is personally and individually liable for all partnership liabilities. Creditors'
claims attach first to partnership assets. If these are insufficient, the claims then attach
to the personal resources of any partner, irrespective of that partner's equity in the
partnership. Because each partner is responsible for all the debts of the partnership,
each partner is said to have unlimited liability

Partnership and taxes
The net income of a partnership is not taxed as a separate entity. But, a partnership
must file an information tax return showing partnership net income and each partner's
share of that net income. Each partner's share is taxable at personal tax rates,
regardless of the amount of net income each withdraws from the business during the
year.

Share Income or loss.
Partnership net income (or net loss) is also co-owned.All net income or net loss is
shared according to the given ratio, otherwise shared equally by the partners.

Advantages/Disadvantages of Partnerships
 Advantages
 Easy to form, no legal
formalities
 Partners can combine
expertise
 Combine capital
 Spread workload
 Share decision making
 Easier to raise funds
i.e. loans etc
 Disadvantages
 More people to share
in the profits
 General partners have
unlimited liability
 Disagreements can
occur
 Partnership may be
dissolved if partner
dies

DIVIDING NET INCOME
OR NET LOSS
•Partnership net income or net loss is
shared equally unless the partnership
contract indicates otherwise.
• The same basis of division usually applies
to both net income and net loss, and is
called the income ratio, or the profit and
loss ratio.
• A partner’s share of net income or net loss
is recognized in the accounts through
closing entries.

Opening the accounts of a
new partnership

Fair market values
when a partner contributes assets
other than cash, the value of such assets
arises.
 The valuations assigned must be agreed
to by all partners

Recording the investment in the partnership
John Blair Partnership Investment.
Cash 40000
Accounts receivable 60000
Inventory 90000
Accounts payable 30000
John Blair capital 160000

Second partner investment.
Richard cross partnership investment
Cash 10000
Inventory 60000
Land 60000
Building 100000
Richard Cross Capital 160000

Similar To Sole Proprietorship
• Partnership accounting is similar to that in
a sole proprietorship except that separate
capital and drawing accounts are
maintained for each partner.
• The capital and drawing accounts show
the amount invested for each partner.

Additional investment
• The additional investments are credited to
the capital accounts as shown below
Cash 20000
John Blair capital 10000
Richard cross capital 10000

Drawing Accounts
• Cash or other assets withdrawn by a
partner.
• Payments from partnership funds of the
personal debts of the partner.
• Partnership cash collected on behalf of the
firm by the partner but retained by the
partner personally.

Loans from partners
• Transfer of funds to the firm by any partner
is consider as loan. It is recorded by
crediting the liability accounts
• It happens when no partner is willing to
increase its capital but firm is in need of
funds so any partner can advance a loan
to the firm

Closing the Accounts of a
Partnership at Year-End

CLOSING ENTRIES
The following 4 closing entries are required for a partnership:
1) Debit each revenue account for its balance and
credit Income Summary for total revenues.
2) Debit Income Summary for total expenses and
credit each expense account for its balance.
3) Debit (credit) Income Summary for its balance and
credit (debit) each partner’s capital account for his
or her share of net income (net loss).
4) Debit each partner’s capital account for the
balance in that partner's drawing account and
each partner’s drawing account for the same amount.

CLOSING ENTRIES
The first 2 entries are the same as a
proprietorship, while the last 2 entries are
different because:
1) There are 2 or more owners’
capital and drawing accounts
2) It is necessary to divide net
income or loss among the
partners.

Closing Income Summary and
Drawings
Joan Blair and Richard Cross have net income
of $60,000, which they decided to equally
divided and their drawings are $24,000 and
$16000 respectively.
Date Particular Debit Credit
June 5
June 5
Income Summary
Joan Blair, Capital
Richard Cross, Capital
(Divide net income with agreement to share
equally)
Joan Blair, Capital
Richard Cross Capital
Joan Blair, Drawings
Richard Cross, Drawings
(Drawings accounts close their respective
capital accounts)
60,000
24,000
16,000
30,000
30,000
24,000
16,000

Income Statement for a Partnership
• Income statement for a partnership differs
from that of a sole proprietorship in only
one respect: a final section may be added
to show the division of net income
between the partnerships.
• Income Statement showing no income
taxes and no salaries expense relating to
services rendered by partners.

BLAIR AND CROSS
Income Statement
As on December 31,
Revenue:
Sales
Expense:
Cost of goods sold:
Inventory, Jan 1
Purchases
Cost of good available for sale
Less: Inventory, Dec. 31
Cost of goods sold
Gross profit on sales
Operating Expenses:
Selling expenses
General & administrative expenses
Net Income
Division of net income:
To Joan Blair (50%)
To Richard Cross (50%)
150,000
460,000
610,000
210,000
_________
100,000
40,000
30,000
30,000
600,000
400,000
200,000
_________
140,000
60,000
60,000
_________
_________
_________
__________________
_________ __________________

Statement of Partners’ Capital
Partners want an explanation of the change in their capital
accounts from one year-end to next and for this purpose
Statement of Partner’s Capital prepared.
Blair And Cross
Statement of Partner’s Capital
For the Year Ended December 31
Blair Cross Total
Balances, Jan 1, 19
Add: Additional investments
Net income for the year
Subtotals
Less: Drawings
Balances, Dec. 31
160,000
10,000
30,000
200,000
24,000
176,000
160,000
10,000
30,000
200,000
16,000
184,000
320,000
20,000
60,000
400,000
40,000
360,000
_________ _________ _________
_________ _________ _________
__________________ __________________ __________________

Partnership Profits and Income Taxes
• Partnerships are not required to Pay Income
Taxes.
• Partnership required to file an information tax
return showing the amount of the partnership net
income and shares.
• Partners net income taxable to the partners
individually in year in which earned.
• Partners pay taxes on their share in net income
not on the drawings
• Net income of the partnership is taxable to the
partners each year.

The Nature of Partnership Profits
• Nature of Profit earned in Partnership is like sole
proprietorships, compensate the owners
1) Personal services rendered
2) Capital investments
3) Entrepreneurial risks
• Profit may be divided between partners on the basis of:
1) Time they devotes to business
2) Partners possess personal skill
3) Different amount of capital they provided
• But all of these things should have explained in
agreement
• Partnership profits and loss sharing agreements usually
includes salary allowances and interest on capital

Division of
partnership Net
Income.

Dividing of Net Income among
Partner
• The partnership agreement should specify the basis for sharing net
income or net loss. The basis should reflect the partners’ capital
investment and service to the partnership.
• The following are typical of the ratios that may be used:
1) A fixed ratio, expressed as a proportion (6:4), a percentage (60% and
40%), or a fraction (3/5 and 2/5).
2) Salary allowances to the partners, with remaining net income or loss
divided in a fix ratio.
3) Interest allowances on a partners’ capital balances, with remaining net
income or loss divided in a fix ratio.
4) Salary allowances to partners, interest allowances on partners’ capital
balances, and remaining in a fixed ratio.
• These methods of sharing net income of partners recognized
differences in the personal service and capital invested in firm by
partners.

Division Partnership Net Income
Among Partner
 Most profit earning agreement fall under one of
the following types:
1. A fixed ratio method;partner may agree upon
any fixed ratio such as 40% and 60% or70% and
30%.
2. Salary allowance to partner.
3. Interest allowance on partners capital balances.
4. Salary allowances to the partners,interest
allowances,or loss divided in fixed ratio.

Division of partnership net income
For example
Annual salary allowance $24000 for Adams and $48000 for Barnes, Which total
$72000 per year,The partnership net income is $96000.The remaining is
divided in fixed ratio.
Division of partnership net income Adams Barnes N.I
Net income is to be
divided……………………………………………………………… $96000
Salary allowances to partner ………………………$24000 $48000 (72000)
Remaining income after salary
…………………………………………………………… 24000
Allocating in fixed ratio:
Adams(50%) …………………………………… 12000
Barnes(50%) …………………………………………………12000
Total share to each partner……. .………………… $36000 $60000 $-0-

The entry to close the income summary
Income summary…………………....96000
Brooke Adams,capital……36000
Ben Barnes,capital…60000
(to close the income summary account)

Interest allowances on partners capital
Both are to be allowed interest at 15% on beginning capital.
That is Adams$160000 and Barnes$140000.
Adams Barnes N.I
Net income to be divided……………………….. $96000
Interest allowances on beginning capital:
Adams(160000*15%) ……………………………….. 24000
Barnes(40000*15%)…………………………………………………6000
Total allocating as interest allowances……… (30000)
Remaining income after interest allowance… 66000
Adams(50%)……………………………………………33000
Barnes(50%)……………………………………………………… 33000
(66000)
Total share to each partner…………………………...$57000 $39000 $-0-

account.
Income summary…………………. 96000
Brooke Adams,capital……57000
Ben Barnes,capital……….39000
(To close the income summary account by
cr each partner with interest at 15% on
beginning capital)

Salary allowances,interest on
capital,remainder in fixed ratio
Salary allowances$24000for adams,$48000for Barnes,Beginning
capital$160000for Adams,$40000for Barnes,allowed interest 10%,profit
or loss equally divided.
Adams Barnes N.I
Net income to be divided………………………………. $96000
Salary allowances to partners………………………… $24000 $48000 (72000)
Income after salary allowances……………………… $24000
Adams(160000*10%)……………………………………..16000
Barnes(40000*10%)…………………………………….. 4000
Total allocating as interest allowances………………. (20000)
Remaining income after salary and interest allowances $4000
Adams(50%)………………………………………………… 2000
Barnes(50%)………………………………………………. 2000 (4000)
Total share to each partner……………………………. $42000 $54000 $-0-

account
Income summary………………...........96000
Brooker Adams,capital ……….. 42000
Ben Barnes,Capital…………54000
(To close the income summary account by
cr each partner with salary,interest at 10%
on capital,divide profit equally)

Authorized salary and interest allowances in
excess of net income
The income for the year is less than the total of authorized salary the net
income of firm only$80000.
Adams Barnes N.I
Net income to be divided………………… $80000
Salary allowances to partner………………. $24000 $48000 (72000)
Income after salary allowances………….. $8000
Adams($160000*10%)……………………… 16000
Barnes($40000*10%)………………………. 4000
Total allocated as interest allowances….. (20000)
Residual loss after salary and interest …. $(12000)
Allocated in fixed ratio:
Adams(50%)…………………………………….. (6000)
Barnes(50%)……………………………………. (6000) 12000
Total share to each partner……………………… .$34000 $46000 $-0-

To Close the income summary
account
Income summary……………………….80000
Brooke Adams,capital……………..34000
Ben Barnes,capital……………46000
(To close the income summary account by cr each
partner with salary,lnterest on invested capital
and dividing the residual loss)

Admission of a new partner.
ADMISSION
By purchase of interest
in the business
Bonus method
By purchase of interest from a
Goodwill
method
partner

HOW TO ADMIT A NEW
PARTNER
1) PURCHASING THE
CAPITAL INTEREST OF
EXISTING PARTNERS.
2) OR PURCHASING THE
CAPITAL INTEREST
FROM AN EXISTING
PARTNER.
1) INVESTING ASSETS
IN A PARTNERSHIP.
2) MAKING
INVESTMENT
DIRECTLY IN THE
FIRM`.

PROCEDURES IN ADDING
PARTNERS

PURCHASE OF A
PARTNER’S INTEREST
 A PERSONAL
TRANSACTION
BETWEEN ONE OR
MORE EXISTING
PARTNERS AND THE
NEW PARTNER.
 THE PRICE PAID IS
NEGOTIATED AND
DETERMINED BY THE
INDIVIDUALS INVOLVED.
 IT MAY BE EQUAL TO OR
DIFFERENT FROM THE
CAPITAL EQUITY
ACQUIRED.
 THE TOTAL NET ASSETS
AND TOTAL CAPITAL OF
THE PARTNERSHIP DO
NOT CHANGE DUE TO
PARTNERSHIP.
Note
ANY MONEY OR OTHER CONSIDERATION EXCHANGED IS THE PERSONAL PROPERTY
OF THE PARTICIPANTS AND NOT THE PROPERTY OF THE PARTNERSHIP.

ENTRY TO RECORD ON PARTNER’S
ADMISSION
BY BUYING CAPITAL INTEREST
Example (Purchasing from a single partner)
Pam lee has an $80,000 equity interest in the partnership of Lee, Martin, and Nash. Lee sells
his entire equity to Paul Trent for $100,000. entry passed would be
srParticulars Debit Credit
Pam Lee, capital
80,000
Paul Trent, Capital 80,000

Example (purchasing from multiple partners)
Trent is to gain admission to the firm of Lee, Martin, and Nash. By purchasing
one-forth of the equity interest of each. The present accounts are Lee $80,000,
Martin $60,000,and Nash $100,000. Trent makes payment directly to all
partners, not to the partnership.
Particulars Debit Credit
Pam Lee, Capital 20,000
Pam Martin, Capital 15,000
Tom Nash, Capital 25,000
Paul Trent, Capital 60,000
To record purchase of 25% of the Partner’s Equity by Paul Trent.
=(80,000+60,000+100,000)*25%
=60,000

DIRECT INVESTMENT IN
PARTNERSHIP
 INVESTING ASSETS IN A PARTNERSHIP.
 MAKING INVESTMENT DIRECTLY IN THE
FIRM.
 BOTH THE TOTAL NET ASSETS AND THE
TOTAL PARTNERSHIP CAPITAL CHANGE.
Note
When the new partner’s investment differs from the capital equity acquired, the
difference is considered a bonus either to:
1) THE EXISTING (OLD) PARTNERS OR 2) THE NEW PARTNER.

ENTRY TO RECORD ON PARTNER’S
ADMISSION
BY INVESTING IN THE FIRM
EXAMPLE
Assume that Ann Philips and Judy Ryan are partners having capital account of $100,000. They
agree to admit Bart Smith and give him one-half equity interest for his investment of $200,000.
Net Assets (Owner’s Equity)………………………………………………......
$200,000
Cash Investment By Bart Smith……………………………………..................
$200,000
Net Assets of new partnership……………………………………………...
$400,000
Smith’s one-half interest……………………………………………................
$200,000

Journal Entry
To acquire interest of $200,000 entry passed is
Sr. Particulars Debit Credit
One-half or 50% equity
=(200000+200000)*50%
=200000
Cash
200,000
Bart Smith, Capital 200,000

ALLOWING A BONUS TO FORMER
PARTNERS
BONUS IS WHEN NEW PARTNER'S INVESTMENT IN THE FIRM IS
GREATER THAN THE CREDIT TO HIS CAPITAL ACCOUNT ON THE
DATE OF ADMITTANCE.
EXISTING PARTNERSHIP HAS EXCEPTIONALLY HIGH EARNING
YEAR AFTER YEAR AND THEY MAY DEMAND A BONUS AS A
CONDITION OF ADMISSION.
EXAMPLE
Jane Rogers and Richard Steel have the 60% equity interest and 40% equity interest
respectively. Agrees to admit David Taylor on his investment of $120,000 for one-forth
interest in partnership. Entry to record
Net assets (owners’ equity) of old partnership……………………. $200,000
Cash Investment By David Taylor…………………………… $120,000
Net assets of new partnership………………………………. $320,000
Taylor's one-forth interest…………………………………… $80,000
To check his total share of 25%
=320000*25%
=80,000
His rest 40,000 is considered as a Bonus to former partners. According to their

Rogers share in bonus = 40000*60%
= 24,000
Steels Share in bonus = 40000*40%
= 16,000
The entry to record
Cash 120,000
David Taylor, Capital 80,000
Janet Rogers, capital 24,000
Richard Steel, capital 16,000
Total capital of new partnership is now $320,000 in which
Tray has one-forth Interest (80,000)
Rogers Capital is $124,000
Steels Capital is $116,000
Note
THE PROFIT SHARING RATIO OF PARTNERS MAY NOT BE THE SAME.

ALLOWING A BONUS TO NEW
PARTNER
WHEN THE NEW PARTNER'S INVESTMENT IS
LESS THAN HIS OR HER CAPITAL CREDIT IN
THE FIRM.
CASH IS NEEDED AND NEW PARTNER IS
ASKED TO JOIN THE PARTNERSHIP.
GOOD WILL OF NEW PARTNER IS NEEDED
EXAMPLE
John Bryan and Merlin Davis are partners in an existing
partnership and have 70% and 30% of equity interest
respectively. Capital accounts are $120,000 and $100,000
respectively, and offer to admit Kay Grant to a One-third equity
interest in the firm upon investing $80,000.

Net assets (owners equity) of old partnership……………… $220,000
Cash invested by Kay Grant…………………………………... $80,000
Net assets of new partnership………………………………... $300,000
Grant’s One third……………………………………………….. $100,000
Grant’s one- third share = 300000*33.33%
= 100,000
Bonus given by Bryan = 20000*70%
= 14,000
Bonus given by Davis = 20000*30%
= 6,000
Entry to record
Cash 80,000
John Bryan, Capital 14,000
Merle Davis, Capital 6,000
Kay Grant capital 100,000

Withdrawal of a partner
A partner may retire and be permitted to withdraw
assets equal to, less than, or greater than the
amount of his interest in the partnership.

Partnership starts between Chris, Brit
Bundy & john Coe .
Description Capital Account Share of profits
Chris acres 75000 20%
Brit Bundy 125000 30%
John Coe 100000 50%
Total partner Capital 300000 100%
o Coe wants to retire or the withdrawal of john
Coe and the treatment accorded the partners
capital accounts under several different
assumptions.

Coe sells his interest to someone else.
• Coe with the consent of Acres and Bundy
,sell his equity to a new partner
• In this case the payment coming partner
goes directly to Coe and there no change
in assets and liabilities of the partnership
• Only the entry that is
Description Debit Credit
Coe’s capital 100000
New partner 100000

Acres and Bundy pay Personal funds.
Description Debit credit
John Coe capital 100000
Chris Acers capital 50000
Brit Bundy capital 50000

Coe’s Interest is purchased by the
partnership.
• Partnership pays Coe in cash for his
equity in the business
• Partnership pays Coe exactly $100000
cash for his equity an amount equal to the
balance in his capital account
• The entry is simple
Coe’s capital a/c 100000
To cash a/c 100000

Partnership pays Coe more than the
balance in his capital account
• Current market value
• Unrecorded goodwill
• Bonus to the withdrawal partner

Relative profit ratio
• Describe the relationship between the
profit and loss-sharing ratio between
continuing partners excluding the retiring
partner
• Relative profit ratio = percentage received
by retiring partner/total percentage
of continuing partners
Acres (20% /50%) 40%
Bundy (30% /50%) 60%

Assume that Coe receive 140000
the capital is 100000 and 40000 is
bonus from acres & bundy
Description Debit credit
Coe capital 100000
Acres capital 16000
Bundy capital 24000
To Cash a/c 140000

Partnership pays less than the balance
in his capital account
• Coe receive 80000 cash in full
settlement of his 100000 capital
account
Coe capital a/c 100000
To cash a/c 80000
To Acres a/c 8000
To Bundya/c 12000

Death of partner
• A partnership dissolved by the death of
any member

• When a partner dies, the partner’s 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

Insurance on lives of partner
• For easier payment for the partner’s
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.
• In the absence of insurance on lives of
partner it is difficult to pay from cash
available without disrupting business
operation

Liqudation Process.
Sale of Assets.
• Assets are sold ,if loss is occurred then it is
divided among the partners in a fixed ratio.
Payment of
Liabilities.
• Liabilities are paid.
Distribution of
capital.
• Partner’s capitals are refunded.If any amount
is left it is divided in profit&loss sharing ratio.

Financial position of the Firm.
Royal simms and Tate
Balance Sheet
December 31,19…
Assets Amounts Liabilities Amount
Cash 50000 Accounts payable 100000
Inventory 200000 Ann Royal, capital 140000
Other assets 1500000 Ed Simms capital 120000
Jon Tate capital 40000
Total 400000 Total 400000

• The terms of sale provide that the inventory and other
assets will be sold to the north corporation for a
consideration of 230000 ,a price resulting in a loss of
120,000.
Cash…………………………………..230000
Loss on sale of business……..120000
Inventory ……………………….200000
other assets …………..........150000
(to record the sale of all assets other than cash to North
Corporation)

Entry to divide loss on sale
Ann Royal capital……......….40000
Ed Simms capital………………40000
John Tate capital……………..40000
loss on the sale of
business………..120000
(to divide the loss on the sale of business
among the partner in the establishes ratio
for sharing profit and loss)

Balance sheet after sale of assets
Royal, Simms, And Tate
Balance Sheet
Assets Amoun
ts
Liabilities Amount
Cash 28000
0
Ann Royal, capital 100000
Ed Simms capital 80000
Jon Tate capital 0
Total 28000
0
Total 280000

• The creditors must be paid in full before
cash is distributed to the partners.
(to complete liquidation of business
Date Description Debit Credit
cash 100000
Ann Royal capital
Ed Simms capital
100000
80000
Cash 180000

Treatment of debit balance in capital account
• To illustrate the situation lets change our assumptions
concerning the sale of the assets by the firm of Royal
Simms and Tate and say that the partnership
assets(except cash) are sold to North Corporation for
$206000. the amount of cash received by the
partnership is $24000 less than in the prior example.
And the loss incurred on the sale of assets is $144000
rather than the $120000 Tate one third share of a
$144000 loss would be $48000, which would wipe out
the $40000 credit balance in his capital account and
create an $8000 debit balance. After the liabilities are
paid , the balance sheet for the partnership would
appear as follow:

Balance Sheet
(After the sale of all assets except cash)
Assets Amount
$
Liabilities Amount
$
Cash 156000 Ann Royal, capital 92000
John Tate
capital(deficiency)
(8000)
Total 156000 Total 156000

Entry to record distribution of cash on hand.
Ann Royal capital………….88000
Ed Simms capital……….…68000
cash a/c………………156000
(to divide the remaining cash by paying the
capital account of Royal and Simms to a
balance of 4000 each representing the
sdivision of Tate loss between them)

Trial balance
After cash distribution
Detail. Total Debit. Total credit.
Ann Royal capital 4000
John Tate capital
( deficiency) 8000
TOTAL $8000 $8000

12B-5
Admission of a New partner.
Four conditions.

PART A & B
Howell, Capital 220,000
Lee, Capital 220,000
To record transfer of one-half capital interest in partnership
from Howell to new partner, Lee
(440,000 * 50%)
So, Capital 80,000
To record transfer of one-half interest of present partners
to new partner, Lee

PART C
Cash 300,000
So, Capital 28,000
To record 300000 investment by Lee for a one-half interest in
partnership:
Total capital before admission…… 440,000
Lee’s investment……………………300,000
Total capital of a new partnership 740,000
Lee’s Interest (one-half)………… 370,000
Bonus to Lee (370,000-300,000 invested) 70,000
Bonus to Lee reduces capital of old partners:
Howell (60%, or 3/5)………………42,000
So (40%, or 2/5)……………………28,000

PART D
Cash 560,000
So, Capital 24,000
To record admission of Lee to a one-half interest in capital
and income:
Total capital before investment by Lee… 44,000
Cash invested by Lee……………………… 560,000
Total capital of new partnership………… 1,000,000
One-half Interest to Lee…………………… 500,000`
Excess of 560,000 investment by Lee over credit
to his capital account…………………….60,000
Bonus of 60,000 divided:
Three-fifths to Howell……………………36,000
Two-fifths to So…………………………..24,000

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