300383 PARTNERSHIP GOODWILL 2I Flashcards
Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have a 25% interest in capital and profits, for an investment of $30,000. What amount should be recorded as goodwill to the original partners?
$0
$5,000
$20,000
$7,500
When a new partner is admitted by investing into the partnership, the total capital of the partnership changes, and the purchase price (amount of new investment) can be equal to, more than, or less than book value. When the purchase price is equal to book value, no goodwill or bonuses are recorded. When the purchase price is more or less than book value, either goodwill or bonuses must be recorded. The total capital of the resulting new partnership determines whether goodwill or bonuses are recorded. Under the goodwill approach, goodwill is recognized on the basis of the total value of the new partnership implied by the new partner’s investment relative to the partners’ total capital. Under the bonus approach, such implied value is not considered. In this problem, the assets are revalued, suggesting that goodwill is being recorded.
Implied value after new investment: $30,000 represents 25% of total value; therefore, the implied total value is $120,000 ($30,000 ÷ .25).
Implied Value $120,000
Total partner’s capital accounts (100,000)(45,000 + $25,000 + $30,000)
Goodwill to original partners $ 20,000
General Partnership
A general partnership is an association of two or more persons or entities to carry on as co-owners a business for profit. A general partnership is formed when two or more persons or entities enter into an agreement to carry on a trade or business with a sharing of the profits and losses between the partners. All partners in a general partnership are referred to as general partners. All of the general partners are jointly and severally personally liable for the debts and obligations of the partnership, unlike a limited partnership, where not all partners are personally liable.
Goodwill
Goodwill is an asset that represents a future economic benefit arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified and separately recognized. Goodwill is generally calculated as the difference between the amount paid for a business minus the fair market value (FMV) of the net assets acquired.
2296.10
The admission or retirement of a partner results in the dissolution of the former partnership and the formation of a new partnership. The conditions under which partners are admitted or retired and the appropriate accounting that should be followed vary with the circumstances. In the following paragraphs, a number of situations are illustrated whereby changes in partners are recorded in the appropriate accounts. In each example, assume that H and J share profits and losses equally prior to any changes in partners.
2296.11
Example: New Partner Buys Prior Partner’s Interest
Capital Balances
H J Other Accounts
Dr(Cr) Dr(Cr) Dr(Cr) Accounts Balances before $(100,000) $(120,000) New partner M buys J's
interest for $150,000
(with H's approval) 120,000 $(120,000) M capital Balances after $(100,000) 0
========= ========= The amount that M pays J for the partnership interest is not recorded by the business itself but represents a personal transaction of the two partners. The $120,000 interest acquired is simply transferred from J to M as the entry indicates. This will result in M having an “outside basis” for personal tax purposes of $150,000, but an “inside basis” for partnership purposes of $120,000.
2296.12
2296.13
2296.14
