Transcript WITHDRAWAL OF A PARTNER

WITHDRAWAL OF A PARTNER
• A partner may withdraw from a partnership
voluntarily by selling his or her equity in the firm
or involuntarily by reaching a mandatory
retirement age or by dying.
• The withdrawal of a partner may be
accomplished by
1. payment from remaining partners’ personal
assets or
2. payment from partnership assets.
PAYMENT FROM
PARTNERS’
PERSONAL ASSETS
• The withdrawal of a partner when payment is made
from partners’ personal assets is the direct opposite
of admitting a new partner who purchases a partner’s
interest.
• Withdrawal by payment from partners’ personal
assets is a personal transaction between the partners.
Partnership
Assets
Bye
BONUS TO RETIRING PARTNER
A bonus may be paid to a retiring partner when:
1. the fair market value of partnership assets is greater
than their book value,
2. there is unrecorded goodwill resulting from the
partnership’s superior earnings record, or
3. the remaining partners are anxious to remove the
partner from the firm.
BONUS
BONUS TO RETIRING PARTNER
The bonus is deducted from the remaining partners’
capital balances on the basis of their income ratios at the
time of the withdrawal.
The procedure for determining the bonus to the retiring
partner and the allocation of the bonus to the remaining
partners is:
1. Determine the amount of the bonus by subtracting
the retiring partner’s capital balance from the cash
paid by the partnership.
2. Allocate the bonus to the remaining partners on the
basis of their income ratios.
BONUS TO REMAINING PARTNERS
The retiring partner may pay a bonus to the
remaining partners when:
1. recorded assets are overvalued,
2. the partnership has a poor earnings
record, or
3. the partner is anxious to leave the
partnership.
BONUS
BONUS TO REMAINING PARTNERS
The bonus is added to the remaining partners’ capital balances
on the basis of their income ratios at the time of the
withdrawal.
The procedure for determining the bonus to the remaining
partners is:
1. Determine the amount of the bonus by subtracting
the retiring partner’s capital balance from the cash
paid by the partnership.
2. Allocate the bonus to the remaining partners on the
basis of their income ratios.
LIQUIDATION OF A PARTNERSHIP
• The liquidation of a partnership terminates the business.
• To liquidate a partnership, follow these steps:
1. Sell noncash assets for cash and recognize any
gain or loss on realization.
2. Allocate any gain or loss on realization to the
partners based on their income ratios.
3. Pay partnership liabilities in cash.
4. Distribute remaining cash to partners
based on their capital balances.
LIQUIDATION OF PARTNERSHIP
• No capital deficiency
• Capital deficiency
– Partner with deficiency pays partnership
– Partners with credit capital balances absorb
deficiency in income sharing proportion