The partnership of Matteson, Richton, and O’Toole has existed for a number of ye

Question

The partnership of Matteson, Richton, and O’Toole has existed for a number of years. At the present time the partners have the following capital balances and profit and loss sharing percentages: Partner Capital Balance Profit and Loss Percentage Matteson $ 149,600 40 % Richton 190,400 40 O’Toole 175,000 20

partner capital balance profit and loss percentage

matterson 149,600 40%

Richton 190400 40%

O’Toole 175,000 20%

O’Toole elects to withdraw from the partnership, leaving Matteson and Richton to operate the business. Following the original partnership agreement, when a partner withdraws, the partnership and all of its individual assets are to be reassessed to current fair values by an independent appraiser. The withdrawing partner will receive cash or other assets equal to that partner’s current capital balance after including an appropriate share of any adjustment indicated by the appraisal. Gains and losses indicated by the appraisal are allocated using the regular profit and loss percentages.

An independent appraiser is hired and estimates that the partnership as a whole is worth $540,000. Regarding the individual assets, the appraiser finds a building with a book value of $255,000 has a fair value of $370,000. The book values for all other identifiable assets and liabilities are the same as their appraised fair values.

Accordingly, the partnership agrees to pay O’Toole $270,000 upon withdrawal. Matteson and Richton, however, do not wish to record any goodwill in connection with the change in ownership.

Prepare the journal entry to record O’Toole’s withdrawal from the partnership.

Explanation / Answer

Because the continuing partners do not wish to record goodwill, a hybrid approach records identifiable asset fair value changes and corresponding capital adjustments, but no goodwill. The remaining excess payment to the withdrawing partner after the revaluation is then treated as a bonus.

            Building                                                       115,000

                  Matteson, capital                                                          46,000

                  Richton, capital                                                            46,000

                  O’Toole, capital                                                            23,000

            O’Toole, capital                                          198,000

            Matteson, capital                                         36,000

            Richton, capital                                            36,000

                  Cash                                                                              270,000

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