300377 PARTNERSHIP FAIR VALUE

Question 1

Kern and Pate are partners with capital balances of $60,000 and $20,000, respectively. Profits and losses are divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land valued at $15,000 for a 20% capital interest in the new partnership. Grant’s cost of the land was $12,000. The partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant’s capital account should be credited for:

$15,000.

$19,000.

$16,000.

$12,000.

Answer 1

$19,000.

In the bonus-to-new-partner method, one needs to compute the total value now for the partnership, whereupon the new partner’s capital account will be based on the new partner’s percentage of the total just computed (even if the new partner’s contribution does not seem to justify the amount).

Total capital of new partnership
($60,000 + $20,000 + $15,000) $95,000
Times capital credit percentage to Grant x .20
Equals capital credit allowed to Grant $19,000
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Note: Grant is given a “bonus” equal to $4,000, the excess of his $19,000 capital credit over the $15,000 fair value of land invested.

Question 2

Capital

Answer 2

Capital is a factor of production, one of the three essential elements of obtaining or producing wealth. Capital is man-made “investment” goods, e.g., tools, machinery, equipment, buildings, and storage, transportation, and distribution facilities. It is considered to be held (owned) primarily by households. Capital is a microeconomic concept.

Note: The economic resource known as capital or real capital refers only to man-made productive assets; money is not included in this definition. To an economist, money is financial capital or money capital.

Capital is the interest of owner(s) in the net assets (total assets minus total liabilities) of an entity. It is the measure of the resources provided to an entity that are considered permanent in nature—long-term debt and owner’s equity.

In an economic sense, capital also means assets that provide productive capacity—a factor of production.

(Compare to land and labor.)

Question 3

Fair Value

Answer 3

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date.

Question 4

2296.12

Answer 4

Question 5

2296.13

Answer 5