Admission by investment will most probably result to the following except

Instead of purchasing interest, (wherein no additional fund goes to the partnership), admission can be done by investment. In this case, the new partner will add resources which ca

Admission by investment will most probably result to the following except

Instead of purchasing interest, (wherein no additional fund goes to the partnership), admission can be done by investment. In this case, the new partner will add resources which can be used in the operations of the partnership.

Again, contribution may be in the form of MONEY, PROPERTY, or INDUSTRY. Of course, in the case of Industry, no additional fund is given but the management will probably be better.

Alright, the first one is when contributed capital is equal to agreed capital.


Lets use our previous case:

Lily and Daisy are partners of FLOWERS PARTNERSHIP. Lily has 40% interest ownership for P120,000, while Daisy has 60% interest ownership for P180,000.

Rose wanted to join the partnership by having 20% interest. She is willing to invest an amount that would equal her capital credit. Lily and Daisy agreed.

So, the analysis would go like this: If Roses capital credit is 20%, that means the total capital credit of the OLD PARTNERS is 80%. (To make it 100%, Im sure you understand.)

Given are the capital of the old partners and their capital credit percentage after admission. So, we get the total amount of capital and divide that by the percentage.

(P120,000 + P180,000) / 80% = P375,000

To get the 20% for Roses capital credit, P375,000 x 20% = P75,000

Or you could also: P375,000  (P120,000 + P180,000) = P75,000

Whichever youre comfortable with.


To record the entry:

Debit Cash 75,000

Credit Rose, Capital 75,000

Total partnership capital after admission is P375,000.

Capital of Lily is still P120,000, while Daisys is P180,000.


SECOND CASE: Contributed capital is LESS THAN Agreed capital

Here we can use Revaluation Method or Bonus Method, depending on the case.

BEFORE WE START, I would like to tell you that there are different ways you can compute for the total partnership capital after admission. This is usually stated, but if not, you can try both and see if your answer in one method is on the choices. It rarely happens that both are in the choices, so not to worry.

  • You get the ownership percentage of the new partner, and the old partners. You divide the total capital of old partners by their ownership percentage, to get the total partnership capital after admission. Then you use this amount and multiply it with the ownership percentage of the new partner to get his capital credit. You use this in ADMISSION BY PURCHASE. You can use this in ADMISSION BY INVESTMENT when the actual contribution of the new partner is not given
  • You get the contribution of the new partner and divide that by his capital interest (percentage) to get the new total partnership capital. This is used when the method is ASSET REVALUATION.
  • You get the amount of contribution by the new partner and add that to the capital of the old partners, you will get the total partnership capital. Thus, the TOTAL CONTRIBUTED CAPITAL EQUALS TOTAL AGREED CAPITAL (CAPITAL CREDIT). But this does not necessarily results to the new partner having a contributed capital equal to his agreed capital. When the new partner's AC = CC, it's revaluation method. When the new partner's AC is not equal to CC, it's bonus method.

Going back to the case:

Lily and Daisy are partners of FLOWERS PARTNERSHIP. Lily has 40% interest ownership for P120,000, while Daisy has 60% interest ownership for P180,000. Their P/L agreement is 40:60.

Rose wanted to join the partnership by having 20% interest. She is going to invest P75,000. Lily and Daisy agreed.

If we are going to follow the second way of computing TOTAL PARTNERSHIP CAPITAL, that would be:

P120,000 + P180,000 + 75,000 = P375,000

And then, we use this as basis for the capital interest of the new partner: P375,000 x 20% = P75,000

Roses contributed capital of P75,000 equals her capital credit of P75,000.

Still following?


Lets move on to the case where AC  CC, but TAC = TCC.

Lily and Daisy are partners of FLOWERS PARTNERSHIP. Lily has 40% interest ownership for P120,000, while Daisy has 60% interest ownership for P180,000. Their P/L agreement is 40:60.

Rose wanted to join the partnership by having 20% interest. She is going to invest P100,000. Lily and Daisy agreed.

Let us compute first for the TOTAL PARTNERSHIP CAPITAL: P120,000 + P180,000 + P100,000 = P400,000.

Capital credit of Rose would be: P400,000 x 20% = P80,000.

Again,

Contributed Capital P100,000

Agreed Capital P80,000

Difference P20,000

How do we account for the P20,000 difference?

When this is the way of computing for the total partnership capital, the difference is to be accounted for as a bonus.


BONUS METHOD

Lets say the problem stated that it is to be considered a bonus, how do we account for it? Since the new partners Contributed capital is greater than the Agreed capital, the difference is a bonus to old partners. As such, it will be allocated to them using their P/L ratio.

Entries are:

Debit to Cash P80,000

Credit to Rose, Capital P80,000


Debit to Cash P20,000

Credit to Lily, Capital P8,000

Credit to Daisy, Capital P12,000


The capital balances of each partner after admission of Rose would be:

Rose  P80,000

Lily  P120,000 + P8,000 = P128,000

Daisy  P180,000 + P12,000 = P192,000

Total partnership capital is P400,000, computed as P120,000 + P180,000 + P100,000 (based on contributions). Or P80,000 + P128,000 + P192,000 (based on capital balances after admission), same thing. Again, whichever youre comfortable with.


Just to show the REVALUATION METHOD:

How do we know the total value of revaluation? First, we must compute for the total partnership capital:

P100,000 / 20% = P500,000

The partnership capital before admission is P300,000, so the asset revaluation amounts to P200,000.

This amount is to be allocated to the old partners using their P/L ratio.

Entry to record is:

Debit to Land P200,000

Credit to Lily, Capital P80,000

Credit to Daisy, Capital P120,000

When revaluation method is used, TOTAL PARTNERSHIP CAPITAL is adjusted due to asset revaluation, not only the partners capital accounts. Our partnership capital is now P500,000.

Got the difference? Cool. Well have another discussion on this on the Exercise Problems.

For now, lets move on to Retirement/Death of a Partner.

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