Chapter 10 Partnership Accounting Flashcards
How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?
Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability
If no goodwill is recorded upon admission of a new partner - which method is used for recording the new partner’s interest?
The bonus method:
Old Partnership Equity+ New Partner Contribution
: New Partnership Equity
x New Partner %
: New Partner Equity AmountNew Partner Contribution - New Partner Equity Amount
: Bonus to Prior Partners using same allocation as P/L
If goodwill is recorded upon admission of a new partner - how is the partner’s interest recorded?
Using the goodwill method:
New Contribution / New Equity % : Partnership Value
Implied Value of Partnership - Capital Accounts of all partners
: Goodwill to Old Partners
Under the Goodwill Method - the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake - then it is assumed that the Partnership is worth $4 -000 ($1 -000/25%)
At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?
Fair Value for assets contributed.
Present value of remaining cash flows for liabilities assumed.
Fair Value - Most advantageous Market
If there is no principal market, then the price in the most advantageous market is the fair value of the stock. The most advantageous market is the market with the best price after considering transaction costs. Although the London quoted market price is higher, after transaction costs the net amount is lower, so New York is the most advantageous market and the fair value is $103.
Fair Value
Fair value includes transportation costs, but not transaction costs.
The price in the principal market for an asset or liability will be the fair value measurement.
FV is NOT:
Fair value is the price to acquire an asset or assume a liability.
FV IS the exit price.
the entity will use the market approach, the income approach or the cost approach to determine the fair value of the asset.
The level in the fair value hierarchy of a fair value measurement is determined by the level of the LOWEST level significant input.
Upon the formation of a partnership, tangible assets (inventory and real estate) would be recorded at fair market value at the date of the investment.
Liquidation
Create a chart starting with Cash, and follow with applicable headings (i.e. Cash, Assets, A/P, Loan, Partner A, Partner B.
Assets are sold for amount sometimes less than worth, so the partners take the hit for the balance. Liabilities are subtracted from cash total. Partner loans are taken from their respective balances.
When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill’s interest exceeded Mill’s capital balance. Under the bonus method, the excess:
Reduced the capital balances of Yale and Lear.
Under the bonus method, any premium paid to the retiring partner is allocated to the remaining partners’ accounts, based on the profit and loss ratios of the remaining partners.
Bonus Problem -
Note: The problem may not indicate the word bonus. However, given capital accounts, and profit/loss %’s, new partner’s investment and percentage ownership = Bonus problem.
1 Add current capital amount total
2 Add new partners investment for total capital bal
3 divide by percentage new partner receives
4 subtract from amount new partner paid
5 difference is divided per old partners as gain or loss to their current capital account balances.
Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability’s fair value, except:
Internally generated cash flow projections for a related asset or liability.
Internally generated cash flow projections for a related asset or liability would be better classified as a Level 3 input rather than a Level 2 input because the internally generated cash flow projection is based on “unobservable” inputs reflecting a company’s “own assumptions” about the way the related asset or liability would be priced.
The following are Level 2:
Quoted prices for identical assets and liabilities in markets that are not active
.
Quoted prices for similar assets and liabilities in markets that are active.
Interest rates that are observable at commonly quoted intervals.
Trouble Debt Restructuring: When a loan receivable is impaired but foreclosure is not probable, which of the following may the creditor use to measure the impairment
A loan is impaired when it is probable that a creditor will be unable to collect all amounts due (including both principal and interest) according to the contractual terms of the loan agreement. When a loan is impaired and foreclosure is not probable, the creditor should measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, the creditor may measure impairment based on (1) a loan’s observable market price, or (2) the fair value of the collateral if the loan is collateral dependent. If foreclosure of a loan is probable, impairment must be measured based on the fair value of the collateral.
On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31 balance sheet, what amount should World report as note payable?
Each payment of $264,200 will consist of both interest and principal, with only principal reducing the liability owed. The interest portion ($22,500) of the initial payment is equal to $1,000,000 multiplied by the interest rate of 9%, and divided by 4 because the payment is quarterly.
Payment of $264,200 - Interest of $22,500 = Principal of $241,700. The principal payment of $241,700 will reduce the liability from $1,000,000 to $758,300.
Fair Value Hedge: A derivative designated as a fair value hedge must be:
- There is formal documentation of the hedging relationship between the derivative and the hedged item.
- The hedge must be expected to be highly effective in offsetting changes in the fair value of the hedged item and the effectiveness is assessed at least every 3 months.
- The hedged item is specifically identified.
- The hedged item presents exposure to changes in fair value that could affect income.
Specifically identified to the hedged asset, liability or unrecognized firm commitment.
