Signatory Assignment of Partnership Interest Made Easy

Sign assignment of partnership interest

hello and welcome to account instruction help and how-to partnerships continued we're going to be talking about the partner sales in this case the sale of a partnership interest something that would of course differ within a partnership than it would with in a sole proprietor or a corporation we will be able to at the end of this describe the process for selling a partnership interest under different types of scenarios create the journal entries to record the sale of the partnership interest define the effect of the journal entry to sell partnership interest on the trial balances and explain the effect of the capital counts of selling the partnership interest now selling the partnership interest will of course be different than if we are in a sole proprietor where we only have the one owner and when we're in a corporation where all the shares are basically the same within a partnership of course we can have differences in the capital balances this can be a bit tricky within the partnership as well because it could be that we can have the sale in a couple different ways for example the partner could sell their partnership interest to a third party bringing in another partner so that would be kind of like the transaction between the partner of the partnership interests say there's three people in the partnership one partner selling their interest to someone outside the partnership could be one way that that happens and if that's the case then the money is actually going to the partner not to the partnership so we'll look at that scenario and then there's the scenario where the partnership buys out the partner so the partner one partner of the three possibly could sell their partnership interest to the partnership in which case the person the entity in this case getting the money is the partnership so those are the two kind of things we want to keep separate and distinct as we go through this there's also going to be some differences in terms of valuation we have to think about the value of the business the value of the capital account when we make these sales on how much the the sales are going to be and the allocation to the capital accounts so this is a really good example of knowing the capital house so even even though these types of transactions don't happen all the time I mean partners aren't going to be going in and out of the organization a lot these ideas with the partnership agreement are really good to know because they really help with understanding what the capital count is in all types of entities what it really is is going to be a kind of the value of the company and how that allocation is going to be affected in these types of situations so we'll start off with a scenario with three partners so we can have a very simple trial balance we're gonna record this transaction within these trial balance we can have this trial balance it's just gonna be we're imagine the big red tea again we've got the assets that more like a half cash is just the only assets just to make it simple green asset on the left hand side debit balance then we got the liabilities on the trial balance after assets we have liability liability bein in this case accounts payable we're imagine it yellow right-hand side because it's a credit then of course we have those capital accounts these being the things that are going to be different on a partnership then a sole proprietor because there's more than one partner and that's the definition of a partnership we need two or more partners so we're gonna say there's three capital accounts here for a partner and partner B and partner L they are gonna be bright blue or imagine them to be bright blue on the T accounts they're gonna be on the right hand side because they are going to be credit balances and we're gonna imagine that that's where we stand at this point kinda like a post-closing trial balance we're not gonna have any revenue and any expenses because they have been basically closed out at this point to the capital accounts so that we are ready at this point to allocate this transaction the transaction being a sale of the capital interest if there was an income statement in there then in terms of the trial balance that income statement isn't included in the capital accounts so that that means that the capital accounts are not at their end value they're not at kind of the book value remember the accounting equation is assets equal liabilities plus owner's equity or assets minus liabilities equals equity or the capital accounts so as long as the income statements closed out to the capital accounts those accounts represent the book value of the company and on that book basis not necessarily on a fair market value basis and we'll have to discuss that as we go through this but now we can use those capital accounts to analyze our problem here so we're gonna say that partner be one of the three partners sells the partnership interest to a new partner in and the partners accept that agreement so what's happening here we got three partners MB and L B wants to leave and he's gonna say okay I gotta go somewhere else I need to sell my interest and that he wants to sell he or she wants to sell the interest to a new partner partner n partner and being outside not one of the three partners of course and if that was the case then the other two partners generally do have to agree to that agreement it's not like B can say okay I'm just gonna sell my partnership interest and you other two partners have to then take in the new partner if they we're going to take in new partners the other two generally have to agree to that but if they do agree to this terms note what has happening be the partner of the organization selling to a new person outside the partnership the new person in giving the money not to the partnership but to be the partner that is leaving so if we think about the transaction if we think of our first question is cash effects in terms of the partnership know that the money is going to be in this case all that we're going to do is allocate the the partnership interest from be the capital count to the new partner and in this case what would the journal entry look like for the partnership port slope for the partnership I would go through the same series of questions we'll do it with all types of journal interest first is cash affected and the answer to this one although cash did trade hands not to the partnership remember so that in this case women do the journal entry for the partnership no cash is not affected so what is happening here well if we look at our trial balance we'll see that we can still look at B's capital account we see that B has a capital count of 124 200 in this example so if we just look at the trial balance that's at home there's a capital account balance in B and has a credit balance in it B is leaving so we're gonna have to make that capital account go down to zero in one way or the other in order to represent the fact that B is leaving there for the capital count has a credit balance we're gonna do the opposite thing to it in order to make it go down so our adjustment for B's leaving would need to include a debit of 120 4200 the amount that happens to be in B's capital accounts bringing it bound to 0 then what's the credit going to go to the credits gonna go to the new owner the new the new owner being in so we have to create a new capital account that capital account being 4n and we're gonna say new capital account started at 0 we're gonna credit it increasing the capital account by the amount that we took me off the books for the 1 24 200 now before we post this you might be thinking well why is that the case why is it the fact that B's capital account represents 120 for 200 when be sold that amounts that his partnership interest his or her partnership interest he sold for 120 thousand so it was sold for 120 the capital % interest for B was 120 for 200 why the difference there because remember that the capital account balances should represent the approximate value of the company in terms of the book value but it's not always perfect and that's because there could be some things for example in terms of the assets and the liabilities that aren't fully valued in market value they might be still on at cost for example like equipment may be valued somewhat differently than it's on the books for because remember we estimate to a value that and we could reallocate the values of the equipment and whatnot and there still could be some issues those issues might be related to intangible assets things like goodwill or something like that so that's the case where it's kind of like you can think of it as similar to when we're thinking about selling a piece of equipment we're selling it at that whatever the market value is it's on our books at the book value which is was the assets value let's take human depreciation so that is the value that we have it recorded as but not necessarily market value same is going to be true for the partnership as a whole these interest in the partnership is being represented as one hundred twenty four thousand two hundred however that's kind of a book value not necessarily the market value very rare that we're actually gonna sell for the exact same value that is on the books in this case it was sold for less could be multiple reasons for that again the value could be different or it could be that maybe be had a rush to sale so is ready to sell it for less than possibly the value that it was worth but for whatever reason that negotiation takes place on the market and whatever the negotiated value will be that's what it will be in terms of record in the journal entry then if we debit B as capital account B had a credit capital account of 124 200 if we debit it by the 120 for 200 B's capital count goes down to 0 and then we put in the new account for ends capital count which of course started at 0 before this transaction we credited ends capital account 124 thousand 200 bringing ins capital account balance up to 120 4200 in essence just replacing B's balance with ends balance so that's kind of the most simplistic scenario but it can be confusing just because of the fact that although cash is being traded in hands the cash isn't going to the partnership and that could be a bit confusing to think through next scenario will be that B sells the partnership interest but this time instead of finding a new partner to replace the beach' sells it to the partnership so now we had three partners before M B and L and now we're saying that B is still leaving but after believes they're just gonna be less that partnerships gonna be left with M and L just two partners or rather than three partners therefore the payment is gonna go from B one of the partners to the actual partnership so that's gonna be the transaction we're gonna say first we're gonna sell it for 200 thousand and then we'll look at varying the price after this for just to see what would happen if we varied the price so we're gonna say that the partnership then is going to pay B for B's gonna leave so B needs to leave B says hey I need to leave and so therefore I need to sell my partnership interest cuz I can't be involved in this anymore and therefore we need to work out a partner a payment to pay B from the partnership to be in order to go from three partners down to two partners so this scenario we can go through our questions again we have the same trial balance we had last time we've got the cash on the books we got the accounts payable on the books and we've got the three partners in B and L with their capital account balances no income or expense accounts at this time it's a post-closing trial balance just looking at the balance sheet accounts because the income statement accounts need to be closed out in order to get a valuation of the company assets minus liabilities equal in those three capital accounts being the value of that company now and this particular scenario we can now look at our first question is cash affected for the partnership answer yes the cash is affected cash is gonna go down because the partnership is going to pay B in order to retrieve the partnership interest from B so we're saying that cash transactions going to be for the two hundred thousand now I would construct the journal entry just like we would another journal entry there's gonna be a bit more complex and first think about cash and then fill in the pieces to the journal entry whatever is missing in order to work through what this transaction would look like so we know cash is leaving we can think of that out cash as a debit balance we're gonna do the opposite thing to it which in this case is a two hundred thousand credit so when we build our journal entry I could say well we know cash is gonna be credited that's the first thing I'm gonna put in that's the first thing we're gonna think about what's the second thing we know about this transaction that is that B's leaving B's leaving and B has a capital account if I look at these capital account its pert in that just take a look at the trial balance just to see what these capital count is it's got to go to zero and currently it's at 120 4200 credit so as a credit of 120 4200 in B's capital account B will no longer be here after this transaction therefore that needs to go down to zero we're gonna do the opposite thing to it as what it is in order to do that it's a credit therefore we're gonna debit it by the 120 4200 so those are the two pieces we know we can basically first start to build now we see that we had a 200,000 cash payment the capital account again in this case is only 120 4200 so the partnership is paying out be more than what the capital account is worth and again there could be multiple reasons for this but it's almost never going to be the case where they're gonna pay out the exact capital account so in this case we're paying out more so what's going to be the difference we can't record that because the debits don't equal the credits in this case we're gonna have to have a debit of some kind or a couple debits in this case in order to shore up this account for the debits to equal the credits and what that is going to end up doing is that the other partners are going to kind of have to reduce or eat that loss because they paid more cash than bees capital account is worth therefore the other two partners the amount owed to them is gonna have to be reduced by that excess that they paid over the capital account balance to be question is how do you gonna figure that how are we gonna figure that out and we'll have to look at how they allocated their income and how are we gonna figure out the new allocation so in this case another scenario we're gonna say that the allocation was I'm gonna say it this way it was 3 : 2 : 5 between em B and L and the reason we're gonna say it that way is that you can kind of figure out the ratio that way so for example if it was if it was broken out 1/3 each between the three partners we could say it's 1/3 each but sometimes the ratio sometimes it's better to use a ratio because they're more exact if we're not talking about numbers that aren't even so if there's a 50/50 percent between two partners that's not a problem but the 1/3 is going to be more difficult to say as a percent it's easier to say as a ratio so for example in this case we have 3 2 & 5 that adds up to 10 so we can say the first partner partner M is going to have 3 over 10 or 30% the second partner is gonna have two over 10 or 20% third partner 5 over 10 or 50% so M the L respectively 30% 20% 50% before this transaction you need to know that because if you look at book problems they might lay it out that way they might not tell you the percentage they might say something like 3 : 2 : 5 and to do that you just add them up you just add them up and then take each individual's 3 2 and 5 divided by the total in this case being 10 and you will come up with the percentage now if it's not even then that's the ratios what you kind of want to use that's going to be the most precise allocation rather than the percentage because it won't be even so the question now is what's going to be the percent allocation between m and L the two remaining partners after B leaves and before this transaction had 30 percent L had 50 cent and be had 20% giving the hundred percent so one way we can think about this one way we can try to do this allocation we could say all right what's gonna be left when B is gone these 20% is now gone so now we have em at 30 and we have L at 50 that adds up to 80 percent so what if we just take we can take the ends 30% divided by 80 percent in order to come up with the new percentage so now it's the 3 3 : 2 ratio adds up to 8 so we would say the 3 over the 8 would give us a new percent 3/8 given us the new percent of 37.5% in this case and then for ELLs capital count if we take the 5 or 4 50 percent divided by the 8 or the 80 percent we would come up to the new percentage allocation of 60 2.5% so now we're going to say M has 37.5% L has 60 2.5% at that is going to now add up to the new hundred percent so that's one way that we can reasonably allocate the new allocation after one of the partners has left we can use this new allocation now to figure out what the plug needs to be and how we're going to allocate it between the two partners so remember that we had before we credited cash two hundred thousand we debited B's capital count 124 two hundred leaving us with 75 thousand eight hundred that's the plug we need another debit in order to plug that up so that we have the debits equal in the credits that's going to reduce somebody's capital accounts that's going to reduce m and ellas capital count only question is how much is it going to reduce it by now we will use these percentages in order to figure that out so 75 thousand eight hundred times M's new capital account 37.5% changed from thirty to thirty seven point five after we removed partner B means that we're going to have the 28 four set 25 that M is gonna have to eat they're gonna have to lower the capital account lower their value to them of the 28 for 25 L is going to have the amounts of 75 800 the difference the plug times the 60 2.5% the new allocation 2l from the original 50 after be leaving meaning that they're going to have to eat or reduce their capital account by 47,000 375 so ends 28 for 25 plus B's 47 375 equals the plug that we're gonna have to reduce it by so if we go to if we think about our total journal entry remember we debited these account capital account to bring it down to 0 we credited cash in order to bring it to record the cash payment and then we have the difference being a debit to Em's capital account now being the 28 for 25 and a debit to Elle's capital account now being 47 375 now note that how I constructed this I built what I knew I didn't necessarily put the debits on top and the credits on the bottom because I'm thinking through it in such a way that it helps us to build it so that's how I want to think through it if we look at our capital accounts now we started with I'm gonna look at that as a table and then we'll record the journal entry M started with 151 200 Em's gonna have to reduce the capital count by 28 425 bringing the capital count down to 122 775 L started with a capital account of 264 600 gonna have to reduce the capital account by 47 375 bring the capital countdown at 217 225 and of course B is capital account was at 124 200 is no longer gonna have the capital account it's gonna go down to 0 let's record this transaction see if that's the case see if that's what actually happens so if we think about the RIC recording of this transaction cash got credited so we know that cash has a debit balance we're gonna credit it making cash go down for the partnership remember the partner is the one pane for the capital account of the partner B who is leaving then we know that bees capital account had 124 200 in it we know that we credited that capital account I mean we debited that capital account to make it go down it has a credit balance by the 124 200 bringing it to zero so those went down and then if we look at Em's capital count happen to have 151 200 in it as a credit we debited it because they had to eat the difference of 28 for 25 bringing the balance down to 122 775 and L had a capital account credit balance of 264 600 he had L had to have a debit of 47 375 bring the balance down to 217 225 so after this transaction we would only be left with the partners m and L and B is now gone and again there's no income statement accounts as of this time because we recorded this as of the time that we closed out the income statement to the capital accounts to have all the value within those capital accounts next scenario is going to be what the same type of transaction where B is leaving but now instead of having 200,000 let's imagine that B is gonna be paid out for only the 50,000 rather than the 200 so you'll remember that B's capital account was on the books at 124 200 and that would be the value of the company if it was on a book value that if the book value equal the fair market value it would be to 124 200 and you would think that the transaction would be the company would pay B out for one twenty four thousand two hundred however that remember that the value on a market basis may not be the book value so in this case the market would they agreed on for whatever reasons whatever they decide did to agree on was that B would sell their value in the company on a book value currently being the capital account balance of 120 for 200 for only the 50 thousand and again there could be multiple reasons for this maybe the valuation of some of the assets are different there could be different values within the goodwill and whatnot that might cause this difference but there's some type of value that is not being thought of to be represented in some way for whatever reason and therefore the market they negotiated value in this case being different than the well count value gonna happen most of the time same kind of thought process if this happens through our transaction we're gonna say cash is cash affected for the partnership yes the partners paying cash to the partner so for the partnership cash is going down cash has a debit balance we're gonna make it go down by doing the opposite thing to it so we're crediting cash it's going up for the partner B whose Levy and hence going down for the partnership that's what we're recording the journal entry for and then the other side we know that B e once again is leaving so that's still the same B has a capital account balance of 120 4200 it needs to go down because B will no longer be you with partnership after B leaves therefore it has a credit balance of 120 for 200 we're gonna do the opposite thing to it which in this case debit 120 for 200 so now we have a debit in our journal entries of 120 for 200 for the B's capital account a credit of 50,000 for the cash that went out the debits are greater than the credits we now need a credit to plug unlike last time where we needed a debit to plug why because we paid less cash then the book value represents the capital count for B to B therefore that what are we going to plug it with of course the other partners the two other partners M and L now they're gonna get a bonus they're gonna mean they're gonna increase their capital account because we're gonna have to credit their capital account they sold it to be for less than the value that it was showing therefore they're gonna get a bump up on their capital account balances from this type of transaction so if we think about this we'll have the same kind of thought process we had before remember the breakout was three to five adding up to ten three over five being 30% - L - M - over five being 20% to be and then five over ten being 50% - L breakout before we have the allocation then once B leaves we have to think okay what are we going to do in terms of the new percentages so that we can figure out how the allocation is going to be and we could say that it was three to five before now it's only three and five so and five it's gonna be the eight so if we take three over the new total of 8 we get 37.5% for em if we take five over the new person total of 8 we get sixty two point five percent so the new percent breakout based on this type of logic would be from B's 30% to B's thirty seven point five after I'm sorry from M's 30% two ends 37.5 after B leaves from B's 20% to 0 because b is living and from Elle's 50% to Elle's new sixty two point five percent after B leaves so the thirty seven point five plus 62.5 between N and L being equal to the new total of course one hundred a hundred percent allocation so that's going to be our allocation that we're going to use in order to allocate the difference that difference being remember our journal entry we took be off the books B had 124 thousand two hundred in their capital account but we only paid fifty thousand cash so 124 200 minus the 50,000 means we have a difference in our journal entry of 74 thousand two hundred that's what we need to allocate with these new percentages 37 point 5 6 2.5 m and L respectively therefore seventy four point seventy four thousand two hundred times M's new percent thirty seven point five brings that that balance to twenty seven eight twenty five that will be allocated to M of that plug number that we need to increase the capital count by L we're gonna take the 74 200 times sixty two point five means that L is going to be allocated 46 375 of the 74 200 plug that we need to make our journal entry correct or in balance so if we then look at the journal entry then we're gonna say that we started off member we have B's capital account debit at 124 200 then we credited cash fifty thousand now we're gonna credit ends capital account by the twenty seven 825 we calculated and we're gonna credit Elle's capital account by 46 375 that we calculated thereby making the it's equal the credits and if we do this then if we look at our worksheet what are gonna be the new capital account balances after we record this and then we'll look at it and see if that's the case M started with 151 200 we're gonna increase Em's capital account after B leaves of 27 825 bringing the new capital account to 179 25 B's capital account was 124 200 it's gonna be gone after this Elle's capital count was 264 600 we're gonna increase Elle's capital account by 46 375 to 310 975 that should be the new allocation and once we record the journal entry let's see if that's the case if we record this entry remember we credited cash so cash has a debit balance we're gonna make it go down so cash is gonna go down by the 50,000 but then we know that B went off the books so B had 124 200 we and it's a credit balance we did the opposite thing to it take him off the books we credited it bringing that account down to zero and then M had a balance of 151 200 credit balance we credited their account by 27 825 increase in the capital account balance because we did the same thing to it to 179 25 and then L had a balance of 264 600 we credited doing the same thing to it 46 375 increasing that balance to 310 975 so now we have the same kind of outcome last time where B is off the books and now we are only left the capital accounts for M and L but now of course Emma Nell's capital accounts are higher based after the be left rather than the last scenario where they were lower because of course the payout being different last time the payout being two hundred thousand being greater than B's capital account balance at this time that pay I'll be in fifty thousand being less than B's capital account balance you