How do i document type sign assignment of partnership interest new york
okay um instead of recording and it kind of stopped on me so I'm gonna start again we're looking at chapter 9 which is partnerships we're looking at formation in operation and we're going to start by explaining the advantages and disadvantages of partnerships basically what the partnership is is has a simplified form of starting businesses compared to other forms other business forms like corporations so for partnership basically we have you know two or more people who are going to be in business together and for I will say for Guan purposes we don't need to file anything aside from just obtaining a business license but we you know we may want to sort of draft some sort of agreement just to make sure that you know everyone in this partnership is clear about you know how are the profit or loss is gonna be divided among the partners you know who's gonna bear the risk and things like that so a major advantage I would say of the partnership I'm not too sure at this point because of the new law but it used to be the partnership was more advantageous because there's no double taxation as compared to corporations so for example if net earnings from the partnership will be $100 and these were distributed to the partners then the partners will have to pay taxes on their ordinary income so is it flow through entity the partnership does not pay taxes but the partners do on the other hand corporations have to pay taxes and then the earnings are distributed to the shareholders which in turn will have to pay another level of taxes so that's what we mean by double taxation but as we know under the new law the corporation's tax rate has been reduced to twenty one percent so you know this is interesting to see which of the two entities may or may not be more advantageous so as we said I guess here we're talking about how the corporations so another advantage will be that corporations are limited on the amount of net operating losses that they're able to carry back and carry forward although are due to the covet 19 tax law changes now corporations are allowed to carry back some net operating losses but in any respect in terms of partnership is like we seen in chapter 13 oh I'm sorry I'm talking about tax but us you know if you recall your tax class you know you're at risk and your basis if there's sufficient basis the partner can deduct losses from the partnership okay so this advantages would be if we have a general partnership will be the unlimited liability so all partners are you know at risk of creditors coming and after their own personal assets so because of the mutual agency so each partner so if all of us in the BA 400 class we're to form a partnership each one of us could engage in a contract and sign that country and that'd be a binding contract for the entire partnership even though other partners might now be aware of that and so we are putting our assets at risk not only for the partnership but also personally so that's the general partnership there is a under the United States commerce law there is a Uniform Partnership Act that guides the partnership agreements just standards general standards that you know we can follow and also defines what the partnership is which we stated earlier there are other types of legal forms of business entities it could be we could form instead of a partnership we could form an S corporation which will provide the limited liability that we are looking for the only thing is that S corporations are limited to a hundred stockholders we could form a limited liability partnership in which case the partners can be limited to the amount of their loss based on so if you would have to engage in a contract and/or you're assisting a client and that customer or client is to satisfy and Sue's you then the other partners are protected so only that partner will be at risk and the rest of the partners in that partnership will be protected another entity is the limited liability corporation in which case it could be taxed as a corporation or a partnership so it provides a lot of flexibility in terms of partnership we have to pay attention to the capital accounts so capital accounts are basically our net assets so or our sort of equity section on the balance sheet for a corporation so instead of having equity we're gonna have our partners capital accounts so this just talks about the articles of partnership and you can take a look at this and your textbook it just has some more details about those standards that I was talking about so I'm just gonna go through this and then talk about the journal entries that are required for our initial investment in the partnership so if the partners we're to contribute cash we simply debit cash and we credit each partners respective capital balances if partners were to contribute assets so in this case we have Carter Carter has invested fifty thousand in cash and Greene contributes assets so take a look at the difference between the book value and the fair market value of these assets and you'll notice that for the most part for inventory for building our fair market value exceeds Book value but for land our fair ball fair market value is less in essence this wouldn't matter for financial reporting purposes because we're going to use fair market value too with these assets transfer to the partnership so in this case we have the cash that Carter had contributed and then for green we have the assets at fair market value now one of the assets the building had a mortgage which the partnership is going to assume so if we remember the total fair market value of the assets was 67,000 so instead of crediting greens capital for 67,000 we're going to deduct the amount of the mortgage that the partnership is responsible for now so this comes to forty three thousand four hundred and we added a liability for the twenty three thousand six hundred okay when we have an investment in the partnership our initial investment if we have an intangible then we have two methods that we can use to account for this intangible the bonus method and the goodwill method so the bonus method is illustrated here so we have James who can contribute cash for seventy thousand and Joy's invest only ten thousand so we have a total of eighty thousand dollars in cash however the partners are one to split their interest in the partnership fifty-fifty so we're going to debit the eighty thousand dollars cash and then we're gonna split their capitals in half so forty thousand to James and forty thousand to Joyce now even though Joyce contributed only ten thousand she's bringing crediting with an additional thirty thousand dollars to her capital account and this thirty thousand is actually the bonus for you know her know-how for whatever intangible she brings to the partnership so the other method is the goodwill method so we're saying is Joy's only contributed 10,000 well James contributed 70,000 so that means that there is a 60,000 difference that we're attributing to Joy's know-how or expertise in this industry and so this 60,000 is sort of the goodwill to Joy's so we're gonna have our 80,000 cash that we received from the two partners 70,000 from James 10,000 from Joyce and then we're gonna recognize the goodwill that was implied from the small contribution in cash that Joyce made and then we're gonna credit the capital balances so note here that James is actually being credited for the amount of cash that he contributed and Joyce is given the 10,000 plus the 60,000 both implied goodwill if the partners were to contribute any additional cash to the partnership then that will be used to increase their account balances partners are able to draw out money from the partnership and so if that's the case we're going to debit drawing or drawers and credit cash so in a way drawing is like dividends okay so now we go into the allocation so the operations of the partnership we are already established we form our partnership and now we have to account for our income or losses and how is our special arrangements how is that been affect the partners the partners capital account so let's assume that we have tinker Evers and chance for a partnership by investing in a hundred and twenty thousand ninety thousand and seventy five thousand respectively evers will be receiving 40 percent of our profits and losses and tinker and chance we'll split thirty thirty on the remaining each partner will receive or actually will be able to draw out ten thousand in cash annually and net income is sixty thousand so I'm just gonna skim through this and then what we have here is each partners beginning capital balances we have the allocation of the sixty thousand dollar net income based on their P&L percentages and then we have their draws which come from there capital accounts and will reduce your capital balances so we end up with three hundred and fifteen thousand of capital on the balance sheet okay so what would happen if we still have the same three partners but in this case we have different stipulations one being that they are to receive interest equal to 10 percent of partners beginning capital balances and they're gonna receive fifteen thousand of compensation Evers and chance each and then we continue to split their profit and losses as 30 percent forty percent and 30 percent so if you recall their beginning capital balances was a hundred and twenty thousand ninety thousand for ever's and seventy five thousand four chance and we have net income of 60 thousand dollars so the first thing that we're all akkadian is the 10 percent of their beginning balances so 10 percent of a hundred and twenty four tinker he receives twelve thousand ten percent forevers ninety thousand of his capital he receives nine thousand and ten percent of 75 thousand seventy five hundred is credited to chance capital now the total amount reduces the amount of net income so this interest is going to decrease the overall net income of the partnership and then we have compensation for everson chance of fifteen thousand dollars each and this also going to further decrease our net income so all we have left to distribute based on their P&L percentages will be fifteen hundred dollars now if after the allocation we have a loss whatever loss we still have to distributed based on their P&L percentages okay so in terms of dissolution so there's different events that may cause a partnership to dissolve or change partners could be retirement could be death we or we can just have new partners trying to or wanting to acquire the partnership so when we're talking about new partners that are joining our partnership we need to pay attention as to who are they making the payments to are they making the payments to the partners or are they making payments to the partnership okay so when we have a new partner now there's three rights that partners are entitled to have one is the co ownership of the property one is to share the rights to share profit and losses the third right is the rights of management participate in management and this has to be approved by the existing partners so it's not like automatically they're gonna be allowed to manage the partnership so there should be some sort of clause or some sort of agreement between the partners of how this is going to be handled okay so in terms of admitting a new partner we have two methods the book value approach and a goodwill approach and we're talking about when cash goes to the partners and not the partnership so assume that we have three partners Scott Thompson and York and they form a partnership and York wishes to retire from this partnership and sell his interest to Morgan we have what their book values are as of the day of this transfer so Scott has it 20 and we have their respective P&L ratios so Morgan wants to acquire 20% I'm sorry wants to acquire a 20% interest in this partnership and is willing to pay $30,000 for it and the money is being paid to the partners not the partnership so we're not going to debit cash because the partnership is not receiving any cash instead we are going to debit the three existing partners capital accounts 20% of the 30,000 and then we're giving a 20% interest to Morgan now in the other methods so this was the book value method and the goodwill method we're gonna have to do a reassessment or find out what is the implied fair market value of this partnership so basically if Morgan is willing to pay $30,000 for a 20% interest in the partnership then the implied value of the partnership is a hundred and fifty thousand and we compare this to the actual book value so it looks like we have a $50,000 of goodwill so we're going to record the goodwill and then credit each of the existing three partners capital accounts based on their PNL percentages and the ones that we have increased their capital accounts then we take out the 20% for each account to give to Morgan and so in this case Morgan is actually being for the full amount of cash paid to the partners okay now what happens if instead of paying the partners the new partner is paying the partnership directly so let's assume that we have a partnership with two partners King and Wilson King has 80,000 in capital balance Wilson has 20,000 and their P&L percentages are 60 and 40 respectively now let's assume that the partners agreed for Goldman to join their partnership and Goldman is gonna pay $20,000 directly to the partnership so in this case and he's receiving a 10% interest now in this case we are going to debit cash because this partner this 20,000 is going to the partnership so under the bonus method so once again we have a bonus and we have a goodwill method so we had their original capital balances was 80 thousand and twenty thousand and then plus the twenty thousand that Goldman contributed to the partnership so our Book value in this partnership right now is a hundred and twenty thousand since we're giving Goldman ten thousand I mean I'm sorry ten percent of the 120 then we're gonna have credit Goldman's capital balance by twelve thousand so ten percent of the one hundred and twenty thousand and then King and Wilson will receive a bonus split up based on their P&L percentages if we're using the goodwill method we're going to assess a fair market value so again we take the amount of cash that's being paid to the partnership / 10% the interest of Goldman is supposed to get and so we have an implied fair market value of 200,000 and we subtract that against the book value again we're adding the 20,000 that is contributed to the partnership and so we have goodwill of 80,000 so we're going to book our goodwill and credit Kingdom Wilson's the existing partners capital accounts increasing their accounts by the goodwill and then accept the cash from Goldman and given me credit for him or her the 20,000 that they paid into the partnership and we have how do we to record the withdrawal of a current partner so this I think this is a last learning objective so just hang in there if a partner desires to leave the partnership we have two methods to deal with it what you don't have to worry about the hybrid method we're looking at the bonus method and the goodwill method so under the bonus method we have the book value of these of this partnership is a hundred thousand Windsor is the one that wishes to leave the partnership and he holds a 20 percent interest in this partnership the partnership has been revalued and so we know that the fair market value is a hundred and eighty thousand so there's an increase in the value of this partnership of 80 thousand and so what winter is going to receive is gonna be 26,000 which represents 10,000 of his capital balance plus 20% of the 80,000 excess between the estimated fair market value and the book value so under bonus method we simply remove winters capital balance and then let me go back to the percentages Duncan had a 50% Smith had a 30% if winter is gone the remaining is 80 so just to reassess the new percentages what we have is Duncan 5/8 of the distribution and Smith has three eighths of the distribution this 16,000 is 20% of the 80,000 in excess valuation trying to all right on this is not fun okay so this 20% of the 80,000 excess valuation is split between Duncan and Smith based on the remaining percent fractions so this Duncan had 50
50 80s or 5/8 and then Smith own 30% or had a P&L of 30% so 3/8 that's the fraction for Goodwill we we know that the 80,000 excess comes from 50,000 from land and then the remaining is 30000 goodwill and so we're increasing the existing partners capital balances based on their P&L percentages and so that will make wind circles we started with 10,000 we added another 10,000 and then we added another 6,000 so that means that winters capital balance at this point is 26,000 so what we have to do is debit his capital balance to zeroed it out and credit cash so that pretty much ends our presentation just make sure to post your questions on the course Q&A that will be posted in Moodle