Form a new partnership from a sole trader and an existing partnership
Combine transferred balances from a sole trader and an existing partnership using newly agreed values, capital and profit shares.
Section 3.3 · Business acquisition and merger
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover the listed merger and acquisition forms, business-versus-assets distinction, goodwill, consideration, journals, ledger accounts, new-entity statements and evaluation. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 and 3.1 skills for identifying assets and liabilities, recording business transfers, preparing financial statements and separating a company's share capital from the former owners' equity.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A new partner contributes net assets of $32,000 and cash of $8,000. What capital contribution is shown before other adjustments?
What you will learn
- Identify the balances contributed by the sole trader and existing partnership
- Apply new transfer and capital terms
- Keep the former partnership's closing accounts separate from the new firm's opening accounts
Close the old partnership before opening the new one
When a sole trader joins an existing partnership to form a new partnership, the old partnership ends under the stated arrangement and the new entity opens with the agreed transferred assets and liabilities. Identify whether the existing partnership contributes as a business or whether its partners transfer selected balances individually.
The old partners' capital and current accounts must be settled using the old agreement, revaluation and any goodwill adjustment required by the question. The new firm's capital accounts then reflect the agreed net assets and cash each new partner contributes. Do not carry old partner balances forward unchanged unless the agreement says so.
Use the new agreement for ownership and profit sharing
The new partnership agreement may change ownership shares, profit-sharing ratios, responsibilities and capital. Prepare the new opening balances from the transfer values and new contributions; the profit-sharing ratio does not by itself determine the capital balances.
Goodwill and revaluation are separate adjustments. Record each only when the question provides a basis and follow whether goodwill remains in the books or is written off. A transition schedule that reconciles old balances, transferred net assets, cash settlements and new capital helps detect duplication or omission.
Pause and explain
What should happen to the old partnership's capital accounts when it is dissolved to form a new firm?
Worked example
A new firm accepts net assets of $78,000 from an existing partnership and net assets of $46,000 from a sole trader. They contribute additional cash of $12,000 and $4,000 respectively. Calculate opening capital before goodwill or withdrawals.
Show the worked solution
- Existing partnership contribution = $78,000 + $12,000 cash = $90,000.
- Sole trader contribution = $46,000 + $4,000 cash = $50,000.
- Total opening capital is $140,000, subject to the new agreement and any separate goodwill or settlement entries.
Answer The former partners contribute $90,000 in net assets and cash; the sole trader contributes $50,000; total opening capital is $140,000 before further adjustments.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
The new firm accepts existing partners' net assets $120,000 and a sole trader's net assets $55,000. The former partners receive $15,000 cash from the old firm before transfer. Explain the new balances and what to check about the $15,000.
Give me a hint
Separate transferred net assets from cash paid out before the new partnership begins.
Compare my reasoning
- The $120,000 and $55,000 are the stated net assets contributed if those values are after the settlement.
- Do not add the $15,000 as a new-entity asset if it was paid to the old partners before transfer.
- Check the old partnership's realisation and capital settlement to confirm whether the $120,000 is already net of the cash paid.
The new firm starts with the agreed transferred net assets of $175,000 in total. Confirm the $15,000 was settled in the old firm's accounts and was not included in transferred balances a second time.
Look for these in your work
- New entity balances identified
- Cash settlement not duplicated
- Old accounts reconciled
Three partners form a new firm. A contributes $70,000 net assets and B contributes $50,000; C contributes $30,000 cash. The agreement credits equal capital balances using cash adjustments. What is total initial capital and why might further cash settlement be needed?
Give me a hint
Compare the total contributions with the agreed equal capital target.
Compare my reasoning
- Total contributed value = $70,000 + $50,000 + $30,000 = $150,000.
- Equal capital target is $150,000 ÷ 3 = $50,000 per partner.
- A is $20,000 above target and C is $20,000 below; an agreed cash transfer or capital arrangement is needed to achieve equal balances without inventing value.
Total initial capital is $150,000, or $50,000 each if equalisation is agreed. A $20,000 adjustment from A toward C would equalise their contribution balances, subject to the agreement.
Look for these in your work
- Total value correct
- Equal capital computed
- Adjustment tied to agreement
A new partnership has the same two former partners and one new partner. The old firm had goodwill of $24,000, but the new agreement says goodwill is not to remain in the books. Explain the sequence to avoid duplicating it.
Give me a hint
Use the old agreement to adjust former partners and the new agreement to open the books.
Compare my reasoning
- Determine how the old firm's goodwill is adjusted among the former partners under the old profit-sharing arrangement.
- If the old goodwill is written off before transfer, remove it from the new opening balances.
- Record any new goodwill only if the new agreement or transaction supplies a supported valuation; do not carry over the $24,000 automatically.
Settle or write off the old goodwill according to the old partnership agreement. Do not include it in the new books unless the new arrangement separately recognises a supported amount.
Look for these in your work
- Old goodwill treatment applied
- New balances kept separate
- No automatic carry-forward
Common mistakes
- Carrying old partners' capital accounts into the new agreement without settlement
- Applying the new profit ratio to every transferred asset
- Recording goodwill twice, in both the old and new accounts
What can you explain now?
Which agreement sets the new partners' opening capital and profit-sharing terms?
Compare with the explanation
The new partnership agreement and agreed transfer values
The new arrangement determines how the incoming balances and partner relationships are established.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Why should old partnership capital and goodwill be reconciled before opening a new partnership?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.