 Hello and welcome to this session. This is Professor Farhad. In this session we would look at the partnership and specifically withdrawal of a partner and this is part four or five. This topic is covered in advanced accounting. It's also covered on the CPA exam, the FAR section. Now I would like to remind you always, I would like to connect with my viewers. So if you have a LinkedIn account, by all means please connect with me on my LinkedIn account. If you're a Facebook user, I have a Facebook page, Farhad lectures and obviously I want you to definitely connect with me on YouTube because this is where I house all my lectures and you'll be notified once I add a new one and I do have a Twitter account. So let's go ahead and get started with a withdrawal of a partner. And what is a withdrawal of a partner? Basically one of the partners decided to leave. We could have three partners, one leaves, we could have four, two, whatever. When someone leaves we need to know how to account for the transaction. Well if there are two and one left basically the partnership is gone but we'll look at various examples. So a partner cannot be prevented from withdrawing from a partnership. So remember the partnership is a voluntary association so a partner can withdraw. It is assumed that partners mutually agree to withdrawals such that withdrawing partners sell their interests to an outside party. So what you can do is this. The first option you can sell your interest to an outside party and this could be agreed upon when you start the partnership where if you decided to leave you can sell your share to an outside party. Or withdrawing partners sell their interest to the remaining partners. Or what you do rather than going to the outside we might say you can only go to the inside. It all depends on the agree upon but I'm just telling you the different scenarios. Or partner transfer partnership assets, partner transfer partnership asset to the withdrawing partner. Basically we'll give you money, we cash you out and you'll get out. Okay so that's basically how it works. So let's look at an example or let's talk about when the payment to a retiring partner is an excess of their book value. Simply put the partner has a $100,000 balance and we're going to give them $120,000 balance. So we're going to pay them in excess of their book value. Book value means in excess of what they have in capital account on the books. So again we're going to have the two methods that we talked about earlier for admitting a partner which is the bonus method and the goodwill method. So basically what is the bonus method? Okay the remaining partners in this situation are charged with the amount that exceeds the book value of the retiring. So basically under those circumstances the remaining partners are charged with the amount of the payment. So in case we paid as I said we paid $20,000 more guess what the remaining partner will have to absorb this loss. Basically it's a loss for them in a sense. If the goodwill method is used the existing partner will not agree to reduce their capital balance. Then what's going to happen? The partnership agreements specify how withdrawal is recorded or partners agree that intangible should be recognized. So again we have more than one option depending on what they agreed upon. So they may reduce it, they may not reduce it. We'll see how it works. And the best way to illustrate this again is to work an example. So basically what we have right now is K, we have Kazma, we have three partners. And the way I like to work with partners is just basically keep track of their balances. We have K, we have F, and we have T. We have those three partners, our partners with capital account as 30,000 to K, 75 to F, and T is 45,000. Income and losses are to be divided for 4 and 2, which is if you are giving ratios like this 4, 4 and 2, always add up the ratio 4 plus 4 plus 2 equal to 10. It means this individual gets 4 tenths, which is 40%, 40%, and this individual gets 2 tenths, which is 20%. Now let's assume we have three individuals and one left, two left. What we have left is 4 and 4, 4 plus 4 equal to 8, then we distribute everything 4, 8 and 4, 8, which is 50% to A and 50% to B if we have A and B. I just want to make sure you are comfortable with ratios because on the exam, on the CPA exam, they may give you ratios. Now when Tuck decided to withdraw, the partnership evaluated the asset from 225 to 252, which represented an increase in the value of inventory of 8,000, an increase in the value of land of 19,000. So, Tucker decided to leave. So the partnership did what? They revalued their assets. Basically, revalue means mark them to market value to see if there's any increases in the value of the asset and what they find out is their value, the asset were valued from 225 up to 252. So there was an increase of the inventory and an increase of the land. So what does that mean? It means before T would drew, we have to revalue the company. We have to revalue the asset. What does that mean? It means we have technically to book again. So basically, we have to debit the inventory because the inventory was increased. We have to debit inventory for 8,000, credit the debit land, increase the land account by 19,000, and simply put what we are saying, we have a $25,000 increase in the value of the company. Now that increase will have to be split 40, 40, and 20. So K is going to get 40% of this. K is going to get 10,800, which is 40% of 27,000. F will get also 40%, 10,800, and T is going to get 20% out of this, which is 5,400. Now, once you do this, this is K capital, F capital, and T capital. Once you do this, increase their balances. Basically, come up here and add 10,800, 10,800, and 5,400. The balance now is 50,400. The balance here is 85,800, and the balance here is 40,800. So after this transaction, this becomes their balances. This becomes their balances. And we'll come back to this point because we do need this point. All right. Prepare the journal entry to record the evaluation. I just did. You debit the assets to increase them, and you allocate the increase to the various partners. The next thing you do is we're going to record the withdrawal of T. Tucker was then given $15,000 cash in the note for $40,000 for his withdrawal from the partnership. So simply put, what's going to happen is we're going to give Tucker $15,000 in cash in the note for $40,000. What does that mean in note for $40,000? It's basically we are forgiving some of the debt that he is responsible for. Okay. So basically, what we gave Tucker is $15,000 plus we would drew it. Basically, we eliminated his debt, $50,000. So we gave Tucker, we're giving Tucker in total $55,000. We're giving Tucker $55,000. We're giving Tucker $55,000. Now, let me go back. Let me go back here to one note. Look, Tucker's account is only $50,000. So we're giving Tucker $55,000, but his account only is $50,400. So how do we input this entry? First, we have to remove Tucker's account. So Tucker capital will have to be debited $50,400. So we need to remove his account. We debit his account. We credit cash $15,000. We credit notes payable. Basically, kind of we removed his note for $40,000. Now we're responsible for it. Basically, we added it to the books. Okay. We're responsible for it. Then what's going to happen? The difference, which is $4,600. The difference between those two is $4,600. Who's going to absorb this if we're using the bonus method? K capital, Kazma capital would absorb $4,600 and full care capital will absorb the other $4,600. So what we did is we gave him $55,000 for his balance of $50,400 using the bonus method. It means the other partners will absorb the losses. So let me show you the journal entry of how this works. This is a journal entry. We gave him $55,000. His balance is $50,400. Therefore, we, the other two partners, absorbed the $4,600. The next thing we're going to look at is the goodwill method. And we have two goodwill method. One is the partial method and one is the full method. So I'm going to first show you the partial method, then we'll look at the full method. Okay. Under the partial method, here's what's going to happen. The goodwill is worth $4,600. I showed you how we computed the goodwill. Basically the difference between what we're giving him and what we're giving him and what we're giving him and what his balance is worth. It means there's a goodwill for the company of $4,600. So what we do is we record the goodwill as $4,600 and we update Tucker's account. So what we do is we update Tucker's account. Now Tucker's account, remember it was $50,400. And what we do, we'll take the goodwill and we give it all to Tucker. Now Tucker's account is $55,000. Okay. So that's what we do with the partial goodwill. Then what we do is we remove Tucker's account. It was $45,000 at the beginning. So that was his beginning balance. Then this $5,400 for the evaluation and this $4,400 coming from the goodwill. So we debit his account $55,000, credit cash $15,000 and credit notes payable $15,000. Under the partial method, the other partners not affected. The other partners were not affected under the partial method. Let's take a look under the full goodwill method. Under the full goodwill method, remember we have $4,600 what we find out. We have $4,600 of goodwill basically. And what's going to happen $4,600? We're going to assume this goodwill applies to all. Okay. So simply put, if Tucker only is worth $4,600, 20% of $4,600, guess what? This has, it means the goodwill for the whole partnership is $23,000 because if the $4,600 belongs to Tucker, we're giving him $4,600 more, which is what's, and he's 20% owner, it means the other partners, they have double that value. So if we're giving him more, we're going to have to give the other partners more. Okay. So under the full goodwill method, what we do is we say, well, Tucker's goodwill account is $4,600, but if we are revaluing everything, if this is, if we're going to increase his account by $4,600 and he owns 20%, it means there's $23,000 in total in goodwill. Therefore, the other two partners each will get 9,200 to their capital account. Now Tucker will, now Tucker's balance is $55,000, then we'll remove his balance. We debit Tucker's balance, $55,000, credit cash, credit notes, payable. Simply put in the full goodwill method, we said the goodwill that Tucker is going to get should also be applied to the other two partners. Okay. That's basically what we're saying. If he's getting $4,600, then the company must be worth more, 20% more, which is worth $23,000 more based on the goodwill of $4,600. Therefore, the $23,000, $4,600 goes to Tucker under the full goodwill method. The other partner absorbed the other goodwill to increase their balances. Now, sometimes what's going to happen is we pay the retiree less than the book value, what's going to happen under those circumstances. The partner may agree to accept less than their interests and could be many reasons. They may not like the company. They think they want to leave early because before things goes down south, maybe may need operating capital for personal reasons because they want the money now and said, okay, we can give you the money, but it's going to be less. The business association may not be acceptable. Maybe this individual is not happy with the partnership and they don't want to be associated with the company anymore. Under those circumstances, the bonus method is justified. Simply put, if your balance is $100,000 and you need to leave, and you need to leave the partnership. Let me go to the last slide. Okay. If your capital is $100,000 and we're only going to give you $80,000, what's going to happen, you are losing $20,000. Under those circumstances, the $20,000 is a bonus to the remaining partners. The remaining partners will get the $20,000 bonus, depending on their capital, whatever their agreement is, four to two. If their agreement is, let's assume if we have $20,000, we have an agreement of four to four to five. Four, four plus, and let's assume this individual left, four left, and there's a bonus of $20,000 and this is A, B, and C. So four, four, and five, and B left, four left. What's left is four and five. Therefore, four plus five equal to nine. Now what's going to happen, that $20,000 will be distributed for nine and five nights. So this is how we distribute the remaining, in case the bonus going to the existing partners. If you have any questions, any comments, by all means email me. If you're studying hard for your CPA, if you're studying study hard for your CPA exam, if you happen to visit my website for additional lectures, please do so. And if you do so, please consider donating money. Thank you very much and good luck.