Discussion:Accounting for sale of partnership interest

Here's the situation. I think this is a challenging one. There's a 3 member LLC and one member needed to exit and sell their interest back to the partnership. The member had a gain on the sale. I'll use fictitious numbers just to give you an idea as to the situation: The partner's basis included paid in capital of $10,000, distributions that amounted to $35,000 and cumulative net losses of $5,000 leaving a capital account balance of -$30,000 (i.e. a Debit balance of $30,000). The amount of the sale of the interest is $70,000 (taken in the form of a note that the LLC is paying it off in installments). The remaining 2 member LLC still remains in operation.

Can anyone give me any insight as to how to account for this transaction? In order to do so, I believe we need to know the book value of the exiting partner's interest. Let's say the book value is $60,000 and the market value of their interest is struck at $100,000. Taking the $100,000 and reducing that due to their capital account debit balance of $30,000 is the reason why the net amount being paid to the partner is $70,000 (payable via a note).

Here's what I've got as an entry so far:

  Credit - $70,000 -Installment Loan (record installment obligation)
  Credit - $30,000 -Partner's Capital Account (to clear their acct balance)
  Debit  - $60,000 -Increase in remaining partners' capital accounts?
  Debit  - $40,000 -Goodwill or some sort of basis adjustment maybe?

Since the partnership (or effectively the remaining partners) now own the interest that the exiting member sold, that's why I think I would have to do something (like the $60k Debit entry above) to reflect this increase in value to the partners' capital accounts. It seems like there's also something I'll need to do with the excess paid over the book value so maybe it's goodwill??

Any help greatly appreciated.

Credit - $70,000 -Installment Loan (record installment obligation)

Credit - $30,000 -Partner's Capital Account(to clear acct balance)

Debit - $60,000 -Increase in remaining partners' capital accounts?

Debit - $40,000 -Goodwill or some sort of basis adjustment maybe?

There is the option the partnership has of electing to make a basis adjustment pursuant to section 754. I think we would want to go ahead and make a basis adjustment.....I'm just not sure how to account for it.

How did you resolve your matter?

https://www.taxschool.uiuc.edu/products.html#LLC