Question

E12-20 Accounting for withdrawal of a partner The O'Hara, Parness, and Lincoln partnership balance sheet reports capital of $50,000 for O'Hara, $125,000 for Parness, and $25,000 for Lincoln. O'Hara is withdraw- ing from the firm. The partners have shared profits and losses in the ratio of 1/2 to O'Hara, 1/4 to Parness, and 1/4 to Lincoln. The partnership agreement states that a withdrawing partner will receive cash equal to the book value of his or her partners' equity. Journalize the withdrawal of O'Hara.

Answer 1

Answer to Q1
Journal Entry - Withdrawal of O'hara
	O'Hara Capital Alc	Dr.	$50,000
	To Cash A/c			$50,000
	(Being O'Hara Equity balance is settled through Cash as per partnership agreement)

Answer to Q2
Case 1	Thorton pays lincoln $174000 cash to purchase Lincoln Interest
	The purchase of an existing partner’s interest in a partnership is a private transaction between the new partner (i.e Thorton) and the applicable existing partner (I.e Lincoln).
	The new partner Thorton makes a payment to the existing partner Lincoln, who in turn transfers the partnership interest.
	This type of purchase does not affect the assets of the partnership.
	Only an entry recording the change in ownership is made in the partnership books.
	The following entry illustrates the recording of Thorton’s purchase of Lincoln’s interest.
	Lincoln"s Capital A/c	Dr.	$130,500
	To Thorton Capital A/c			$130,500
Case 2	Thorton contributes $87000 to the partnership, acquiring 1/4 interest in the firm
	1/4 interest i.e 25%
	Total book value of firm		261000
	(43500+ 87000+ 130500)
	25 % of total value (261000*25%)		65250
	Thorton Paid		87000
	Excess paid i.e goodwill		21750
	Journal entry
	Cash A/c	Dr.	$87,000
	Goodwill A/c	Dr.	$21,750
	To Thorton Capital A/c			$        87,000
	To George Capital A/c (21750*20%)			$          4,350
	To Murphy Capital A/c (21750*25%)			$          5,438
	To Lincoln Capital A/c (21750*55%)			$        11,963
	(Being Cash contribute by thorton and goodwill shared by existing partner)
Case 3	Thorton contributes $87000 to the partnership, acquiring 1/6 interest in the firm
	1/6 interest is		17%	Rounded off
	Similar to case 2
	Total book value of firm		261000
	(43500+ 87000+ 130500)
	17 % of total value (261000*17%)		44370
	Thorton Paid		87000
	Excess paid i.e goodwill		42630
	Journal entry
	Cash A/c	Dr.	$87,000
	Goodwill A/c	Dr.	$42,630
	To Thorton Capital A/c			$        87,000
	To George Capital A/c (42630*20%)			$          8,526
	To Murphy Capital A/c (42630*25%)			$        10,658
	To Lincoln Capital A/c (42630*55%)			$        23,447
	(Being Cash contribute by thorton and goodwill shared by existing partner)
Case 4	Thorton contributes $87000 to the partnership, acquiring 1/3 interest in the firm
	1/3 interest		33%	Rounded off
	Total book value of firm		261000
	(43500+ 87000+ 130500)
	33 % of total value (261000*33%)		86130
	Thorton Paid		87000
	Excess paid i.e goodwill		870
	Journal entry
	Cash A/c	Dr.	$87,000
	Goodwill A/c	Dr.	$870
	To Thorton Capital A/c			$        87,000
	To George Capital A/c (870*20%)			$              174
	To Murphy Capital A/c (870*25%)			$              218
	To Lincoln Capital A/c (870*55%)			$              479
	(Being Cash contribute by thorton and goodwill shared by existing partner)

Answer to Q3
Case 1	Personal Transactions
	explantion similar to Q2 case 1
	Journal entry
	Ho's Capital A/c	Dr.	$35,000
	To Wei's Capital A/c			$35,000
Case 2	The partnership pays Ho cash of $10000 and balance in notes payable
	Journal entry
	Ho's Capital A/c	Dr.	$35,000
	To Cash A/c			$10,000
	To Notes payable A/c (35000-10000)			$25,000
Case 3	The partnership pays Ho $65000
	Journal entry
	Ho's Capital A/c	Dr.	$       35,000
	Kin's Capital A/c (30000*(4/7)		$       17,143
	Ling's Capital A/c (30000*(3/7)		$       12,857
	To Cash A/c			$65,000
Case 4	The partnership pays Ho $25000
	Journal entry
	Ho's Capital A/c	Dr.	$       35,000
	To Cash A/c			$25,000
	To Kin's Capital A/c (10000*(4/7)			$    5,714
	To Ling's Capital A/c (10000*(3/7)			$    4,286