Chapter 10 Section 2: Partnerships

Question 1

How are assets and liabilities valued at the formation of a partnership?

Answer 1

Assets = FV
Liabilities = PV

Question 2

What are the three ways to create new partnership interest with the investment of capital?

Answer 2

Exact
Bonus
Goodwill

Question 3

Explain the exact method

Answer 3

Tells you what to pay to get a certain interest.
Add current net assets of the partnership
Turn the amount they want to own into a fraction, and subtract the numerator from the denominator.
Divide net assets by that number

Question 4

Explain the bonus method for addition

Answer 4

The balance in total capital accounts controls the capital account allocation

Question 5

Explain the goodwill method for addition

Answer 5

The investment going in controls capital account allocation and goodwill allocation through implied value and goodwill
Take their donation and divide by their ownership percentage. That is what the value of the company should be. Debit the difference to goodwill

Question 6

What are the two ways to treat withdrawal of a partner?

Answer 6

Bonus

Goodwill

Question 7

Explain the bonus method for withdrawal

Answer 7

The bonus is the difference between their capital account and what they’re paid. Use their remaining profit and loss ratio (used after the partner leaves) to allocate.

Question 8

Explain the goodwill method for withdrawal

Answer 8

Use goodwill to get the capital account to the right amount, and pay that. Use their current profit and loss ratios