CHAPTER XXXV
OTHER PARTNERSHIP PROBLEMS
Admission of a New Partner.—In [Chapter XXXIII] a distinction was made between buying out an interest in a business and making an investment in a business. In the former case no new capital is acquired, while in the latter the capital of the firm is increased by the amount of the new partner’s contribution.
When a new partner is admitted he usually acquires not merely the right to share in the profits, but he also obtains a share in the net worth (often called “net assets”) of the enterprise. For this reason it is necessary that all the partners, including the new member, agree on the value of the net assets, and in this connection any of the following possibilities may arise:
1. Upon admission of the new partner the book accounts may be considered to represent the true status of the business. A balance sheet is drawn up and the new partner is admitted on the basis of the net worth it shows.
2. It may be agreed that the assets are not worth the amount at which they are carried on the books and that a new valuation be placed upon them.
3. The business may be considered to be worth more than the amount shown by the balance sheet.
First Case.—In the first case little difficulty is met in making the opening entry admitting the new partner. For instance, if the balance sheet shows a net worth of $30,000, and the new partner wishes to make an investment in order to secure a one-fourth interest in the firm, the amount to be contributed is manifestly $10,000. Assuming that he makes a cash investment of $10,000, the following entry meets all accounting requirements:
| Cash | 10,000.00 | |
| A, Capital | 10,000.00 |
As a result of this cash investment of $10,000, the net worth of the new firm is increased to $40,000 and the one-fourth interest belonging to A is evidenced by his capital account at $10,000. The new firm may now continue the old records and no further adjustments need be made.
Second Case.—In the second case it is necessary to place a new valuation upon the assets of the old firm and the accounts of the old partners must be adjusted accordingly. For instance, suppose A and B are equal partners and the financial status of the firm is shown by the following balance sheet: