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15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner

Admission of New Partner​

Methods:

  • Purchase from existing partner (no new capital to partnership)
  • Investment in partnership (new capital added)
  • Combination (partial purchase, partial investment)

Method 1: Purchase from Existing Partner

  • New partner buys interest from existing partner
  • No change in partnership assets
  • Only capital accounts change

Example:

  • Partner A sells 50% of interest (€30,000) to Partner C
  • Partner C pays €30,000 to Partner A (not to partnership)

Journal Entry:

301000 Partner A, Capital         €30,000
303000 Partner C, Capital                      €30,000
To record admission of Partner C (purchase from Partner A)

Method 2: Investment in Partnership

  • New partner invests cash/assets
  • Partnership receives new capital
  • May require bonus to existing partners or new partner

Example: New Partner Invests at Book Value:

  • New Partner C invests €40,000
  • Gets 1/3 interest (partnership now worth €120,000)
  • No bonus needed

Journal Entry:

510000 Cash                       €40,000
303000 Partner C, Capital                      €40,000
To record admission of Partner C

Example: New Partner Invests with Bonus to Existing Partners:

  • Partnership worth €100,000 (Partner A: €60,000, Partner B: €40,000)
  • Partner C invests €60,000 for 1/3 interest
  • Total after investment: €160,000
  • Partner C should have: €160,000 × 1/3 = €53,333
  • Bonus to existing partners: €60,000 - €53,333 = €6,667
  • Split bonus: Partner A (60%): €4,000, Partner B (40%): €2,667

Journal Entry:

510000 Cash                       €60,000
301000 Partner A, Capital                       €4,000
302000 Partner B, Capital                       2,667
303000 Partner C, Capital                       €53,333
To record admission of Partner C with bonus to existing partners

Example: New Partner Invests with Bonus to New Partner:

  • Partnership worth €100,000
  • Partner C invests €40,000 for 1/3 interest
  • Total after investment: €140,000
  • Partner C should have: €140,000 × 1/3 = €46,667
  • Bonus to Partner C: €46,667 - €40,000 = €6,667
  • Reduce existing partners: Partner A (60%): €4,000, Partner B (40%): €2,667

Journal Entry:

510000 Cash                       €40,000
301000 Partner A, Capital                      (€4,000)
302000 Partner B, Capital                       (2,667)
303000 Partner C, Capital                       €46,667
To record admission of Partner C with bonus to new partner

Withdrawal of Partner​

Methods:

  • Sell interest to remaining partners (no change in partnership assets)
  • Partnership buys out partner (partnership pays partner)
  • Receive assets (may receive non-cash assets)

Method 1: Sale to Remaining Partners

  • Withdrawing partner sells to remaining partners
  • No change in partnership assets
  • Only capital accounts change

Example:

  • Partner A sells interest (€60,000) to Partners B and C
  • Partners B and C pay Partner A directly

Journal Entry:

301000 Partner A, Capital         €60,000
302000 Partner B, Capital                      €36,000
303000 Partner C, Capital                      24,000
To record Partner A's withdrawal (sale to remaining partners)

Method 2: Partnership Buys Out Partner

  • Partnership pays withdrawing partner
  • May pay at book value or adjusted value
  • May include bonus

Example: Payment at Book Value:

  • Partner A withdraws
  • Capital balance: €60,000
  • Receives €60,000 cash

Journal Entry:

301000 Partner A, Capital         €60,000
510000 Cash                                   €60,000
To record partner withdrawal at book value

Example: Payment with Bonus:

  • Partner A withdraws
  • Capital balance: €60,000
  • Receives €70,000 (bonus of €10,000)
  • Bonus reduces remaining partners' capital

Journal Entry:

301000 Partner A, Capital         €60,000
302000 Partner B, Capital                       (€6,000)
303000 Partner C, Capital                        (4,000)
510000 Cash                                   €70,000
To record partner withdrawal with bonus

Example: Payment Below Book Value:

  • Partner A withdraws
  • Capital balance: €60,000
  • Receives €55,000 (€5,000 bonus to remaining partners)

Journal Entry:

301000 Partner A, Capital         €60,000
302000 Partner B, Capital                        €3,000
303000 Partner C, Capital                        2,000
510000 Cash                                   €55,000
To record partner withdrawal below book value

Luxembourg Compliance Note​

Partner changes in Luxembourg:

  • Must update partnership agreement
  • Must file with RCS
  • Must use proper accounts
  • Must comply with law

Think It Through​

What issues arise when a partner is admitted or withdraws? How should they be handled?