Chapter 4.

Withdrawing or Adding A New Partner

A partnership is based on a contractual agreement among individuals and ends when a partner withdraws from the
firm or a new partner is added. The business, however, may continue with a new partnership agreement. A partner may
withdraw by selling his or her interest or equity in cash or other assets. If all the partners agree, a new partner may join in the
firm either by buying the interest of a present partner, by contributing additional assets equal to the equity he or she is
acquiring, or by investing either more or less than the equity he or she will receive.

The partners hip agreement should outline the procedure governing a partner who wishes to withdraw from the
business. Withdrawal may occur when a partner wants to retire or does not wish to continue under the present business
arrangements.

Chapter 4.1 Admission of a New Partner

An existing partnership may admit a new partner with the consent of all the partners. When a new partner is admitted,
the partnership is dissolved and a new partnership is formed. Upon the admission of a new partner, a new agreement covering
partners’ interests, profit and loss sharing and other consideration should be drawn because the dissolution of the original
partnership cancels the old agreement. Of the original partnership cancels the old agreement.

The admission of a new partner may occur in either of two ways, namely:
1. Investment of assets in the partnership by the incoming partner
2. Purchase of all or part of the interest of one or more of the existing partners

Investment of assets in the partnership by the incoming partner

Example 1 Investment in Cash

To illustrate the first way, assume that on August 31, 2023 Knight is to invest P40,000.00 in cash to receive a
one – fourth interest in the partnership. The following shows the equity of the present owners:

Saar 50,000.0
0
Loretto 30,000.0
0
Abdullah 40,000.0
0
Total 120,000.0
0

After Knight’s investment of P40,000.00, the total equity is P160,000.00. One-fourth of P160,000.00 is
P40,000.00, the equity of the new partner.

The journal entry to illustrate the addition of Knight under this assumption is as follows:

Example 2 Investment of Cash and Other Asset

On the same example, assume that Knight is to invest P10,000.00 cash and P30,000.00 of merchandise
inventory to receive a one – fourth interest in the partnership. Prepare the journal entry.
 Example 3 Bonus to Old Partners

A new partner may be expected to invest more assets than the equity he or she is to receive.

Assume on the same example that the present equities are the same as previously indicated and that Knight
is to invest cash of P36,000.00 for a one – fifth interest. The amount to be credited to Knight’s capital account for a
1/5 interest is determined as follows:

Providing that the present partners share equally the bonus of P________, each partner will get P_______.
Below will be the journal entry to record the transaction:

Example 4 Bonus to New Partner

A bonus may be given to a new partner when the new partner is given more equity than his or her current capital
balance.

Assume that Knight invests P20,000.00 for a one – fourth interest. Thus, the old partners who share net income
and losses equally, must give up an equal portion of their equity to knight as determined below:

Each capital account will be deducted by P_________ (P_________ divided by 3). The entry to record the
transaction is as follows:

Purchase of all or part of the interest of one or more of the existing partners

Example 5 Purchase from One Partner

Assume the following data for the LMN Partnership on December 31, 2023:
 Partners Capitals Profit and Loss Ratio
L 20,000.00 20%
M 20,000.00 30%
N 30,000.00 50%
Total 70,000.00 100%

On this date, O is admitted to the partnership.

Assume that O purchase one – half of the interest of L for P15,000.00. Prepare the journal entry.

Regardless of the amount paid to L, the entry shall only be limited to the capital interest that the existing or
old partner sold. Two points should be noted. First, the P15,000.00 cash paid by O to L was a personal transaction
between the two and does not affect the partnership records. The second point is that M and N must agree to admit O
as a partner since a partnership is based on agreement of all partners.

Example 6
Assume on the same example that O purchase one – half of the interest of L for P8,000.00. Prepare the
journal
entry.

Example 7 Purchase from all the partners

Still on the same example, assume the following:
1. O is admitted into the partnership for a fifty percent interest in the profit or losses of the
partnership
2. The old partners (L, M & N) are to retain their original capital and profit – sharing relationships
to each other and are to transfer sufficient amount of their own capital account to O in order to
accomplish the admission as planned.
If O agreed to pay a total amount of P50,000.00 to L, M and N prepare the necessary journal entries to record
this transaction.

P & L Ratio
Partners Capitals Adjustment Current Capital
Adjustment

Total

The above entry shows that no cash is transferred to the partnership. Moreover, the P50,000.00 cash
consideration passes outside the partnership framework. The amount debited to the original partners’ capital accounts
are equal to the new partner’s ratio multiplied by the balances of the capital account of the said partners. There is no
definite rule as to how the P50,000.00 cash is to be divided among the individual partners.
Assignment:

Problem 1. Partners A, B and C will admit D as a new partner with a capital interest of 50% to their partnership. Below is the
capital of the old partners:

A 10,000.00
B 10,000.00
C 30,000.00
Total 50,000.00

Partner D will invest the cash of P5,000.00, computer equipment with a value of P35,000.00 and merchandise inventory of
P10,000.00. Prepare the journal entry.

Problem 2. Assume on the same problem, partner D will invest cash of P50,000.00 for a 40% interest to the partnership.
Prepare the entry to record the transaction.

Problem 3. Still on the same problem but this time partner D will invest cash of P50,000.00 for a 60% interest in the
partnership. Prepare the journal entry.

Problem 4. Partners W, X and Y are partners in a partnership business. Below is the capital of each partner:

Partners Capitals Profit and Loss Ratio

W 10,000.00 20%
X 20,000.00 30%
Y 30,000.00 50%
Total 60,000.00 100%

1. With consent from partners W and X to permit Z to be a new partner, Y will sell 40% of his interest to Z for
P15,000.00. Prepare the journal entry.
2. With consent from partners W and X to permit Z to be a new partner, Y will sell 40% of his interest to Z for
P10,000.00. Prepare the journal entry.

Problem 5. Assume that on the same problem in Problem 4, Z will buy 40% interest from all the partners. Prepare the journal
entry to record the transaction.
Chapter 4.2 Withdrawal of New Partners or Old Partners

Withdrawal of Capital by the New Partner

Example 1. Partners A and B share profits equally. C is to be admitted as a partner by contributing cash to the firm.
The capital balances of A and B before the admission of C are as follows:

A 32,000.00
B 40,000.00
Total 72,000.00

On September 30, 2023, C invests P20,000.00 for a one-fifth interest in the partnership. The total agreed capital of the
new partnership is to be P90,000.00. The entry to record the investment of C is:

How to analyze and adjust to the agreed new capital of the partnership of P90,000.00?

Whose capital will need to adjust for withdrawal?

Difference Old Partner New Partners

To arrive at the total agreed capitalization of the new partnership, the new partner should decrease his capital
investment by P_______. This is accomplished by withdrawing the P_______ from the partnership. The entry to
record C’s withdrawal is:

Withdrawal of Capital by the Old Partner

Example 2. Assuming the same capital investment of partners A and B above, C will invest P16,000.00 for a 20%
interest in the partnership. The total agreed capital of the new firm is to be P80,000.00 and the agreed new profit and
loss ratio will be A for 40%, B for 40% and C for 20%. The entry to record the investment of C is:

The withdrawal of capital is analyzed as follows:

To compare the contributed capital and the agreed capitals of the partners as follows:
 Difference A B C

Since ___ has an agreed capital credit less than his contributed capital, he should withdraw to bring his capital in
proportion to his new profit and loss ratio. The entry to record the withdrawal is:

Determining a New Partner’s Investment Cost

In the previous illustrations, the amount of the new partner’s investment has been provided. In some instances, the
amount of the cash investment of the new partner should contribute is to be determined.

Example 3. Assume that on October 31, 2023, E and F are partners with capital of P20,000.00 and P10,000.00,
respectively. The partners share profit and losses equally. G is to be admitted as a new partner for one – fourth
interest. The old partners agree that the assets of the partnership are to be revalued up by P3,000.00 to recognize the
increase in value of the land which is one of the assets of the partnership. The question is, how much should G
investment for his one – fourth interest?

To determine the new partner’s investment cost, it is important to note the total resulting capital of the partnership and
the percentage of ownership interest retained by the old partners. In this example, the old partners retain a three –
fourth’s interest in the resulting partnership.

Entry to recognize the revaluation of the land:

To compute for the required new partner capital

Assuming that the new partner has contributed cash into the partnership:

Retirement of Death of a Partner

When a partner dies, retires or withdraw from the partnership, the partnership is dissolved, but the remaining partners
may continue operating the business. The retiring partner may receive settlement equal, more than or less than his
interest. The interest of the withdrawing partner is usually measured by his capital balance before his withdrawal,
increased or decreased by his share in the following adjustments:
1. Profit or loss from operations from the last closing date of the date of his retirement, and 2.
Changes in the valuation of all assets and liabilities
Example 4. At the beginning of the year, January 1, 2023, the capital balances and profit and loss ration of R, S and T
are as follows:

Partners Capital Balances Profit and Loss Ratio

R 10,000.00 50%
S 15,000.00 30%
T 20,000.00 20%

On April 30, 2023, R withdraw from the partnership. The net income of the partnership for the four months ended
April 30, 2023 is P14,000.00. It is agreed that the inventory costing P5,000.00 has a market value of P7,000.00 on
April 30, 2023.

Settlement equals withdrawing partner’s interest

The following are the entries:

Computation of the adjusted capital of partner R:

Settlement is more than the withdrawing partner’s interest

Assuming that R is to be paid of P19,500 as compared to his ending balance interest of P18,000.00.

Computation for the share of the remaining partners in the settlement of R more than his capital interest:
Settlement is less than the withdrawing partner’s interest

Assuming the same data as before except that this time, R is to be paid P17,000.00 as compared to his ending capital
of P18,000.00.

Computation for the share of the remaining partners in the settlement of R less than his capital interest:

ASSIGNMENT

1. U and V share profits and losses equally. The capital balances of the partners before the agreed admission of W
are P10,000.00 and P8,000.00, respectively, on October 31, 2023. W is to invest P5,000.00 for a 20% interest in
the partnership. The agreed capital of the new partnership is P20,000.00. Compute for the adjustment of the
capitals and prepare the entries for the investment of C and the adjustment of the capital of either the old or new
partner.
2. At the beginning of the year, January 1, 2023, the capital balances and profit and loss ratio of Y, X and Z are as
follows:

Partners Capital Balances Profit and Loss Ratio

Y 30,000.00 50%
X 20,000.00 30%
Z 10,000.00 20%

On March 31, 2023, Y withdraw from the partnership. The net income of the partnership for the three months
ended March 31, 2023 is P10,000.00. It is agreed that the equipment costing P30,000.00 has a market value of
P35,000.00 on March 31, 2023.
a. Prepare the journal entries for the share of the profits and revaluation of the equipment.
b. Prepare the journal entry if the partners agree that they will give Y the settlement equal to his capital
interest.
c. Prepare the journal entry if the partners agree to give Y the settlement of P35,000.00.
d. Prepare the journal entry if the partners agree to give Y the settlement of P40,000.00.