Chapter 12

Question 1

Purchase of a partner’s interest

Answer 1

involves only a transfer of capital among the partners who are part of the transaction

–> The total capital of the partnership is not affected.

Question 2

Investment of assets in the partnership

Answer 2

increases both the partnership’s net assets (total assets less total liabilities) and its total capital.

Question 3

Accounting for the purchase of an interest

Answer 3

In the partnership, only the transfer of a partner’s capital is recorded.

• ->The old partner’s capital account is debited for the ownership claims that have been given up.
• ->The new partner’s capital account is credited with the ownership interest purchased
• ->Total assets, total liabilities, and total capital remain unchanged, as do all individual asset and liability accounts.

Question 4

Investment of Assets in A Partnership

Admission by investment

Answer 4

occurs when a partner makes a contribution of assets (such as cash) to the partnership.

–>This transaction increases both the net assets and the total capital of the partnership.

Question 5

Bonus to Old Partners

Answer 5

With the admission of a new partner, the existing partners may want a bonus

–>A bonus may be requested to reflect the fact that the fair value of the partnership’s assets may exceed their carrying value

–> and if a partnership has been profitable, goodwill may exist.

Question 6

Internally generated goodwill

Answer 6

is not recorded as part of the company’s net assets.

–>Where this is the case, the new partner is usually willing to pay a bonus to become a partner.

Question 7

A bonus to the old partners [occurs]?

Answer 7

A bonus to the old partners occurs when the new partner’s investment in the firm is greater than the credit balance in the capital account on the date of admittance.

–>The partnership allocates the bonus to the existing partners based on their income ratios before the admission of the new partner

–> The bonusincreases the capital balances of the old partners.

Question 8

The procedure for determining (new partner) capital amount:

Answer 8

1. Determine the total capital of the new partnership
   ○ Add the new partner’s investment to the total capital of the old partnership.
2. Determine the new partner’s capital credit.
   ○ Multiply the total capital of the new partnership
   by the new partner’s ownership interest
3. Determine the amount of bonus.
   ○ Subtract the new partner’s capital credit from the
   new partner’s investment.
   ○ (new partner’s investment - new partner’s capital
   credit)
4. Allocate the bonus to the old partners on the basis of their income ratios before the admission of the new partner

Question 9

Bonus to new Partner

Answer 9

A bonus to a new partner occurs when the new partner’s investment in the firm is less than the credit balance in his or her capital account.

• -> A bonus to a new partnerdecreases the capital balances of the old partners
• ->The amount of the decrease for each partner is based on the profit and loss ratios before the admission of the new partner.

Question 10

The procedure for determining (new partner) capital amount: (same)

Answer 10

1. Determine the total capital of the new partnership
   ○ Add the new partner’s investment to the total capital of the old partnership.
2. Determine the new partner’s capital credit.
   ○ Multiply the total capital of the new partnership
   by the new partner’s ownership interest
3. Determine the amount of bonus.
   ○ Subtract the new partner’s capital credit from the
   new partner’s investment.
   ○ (new partner’s investment - new partner’s capital
   credit)
4. Allocate the bonus to the old partners on the basis of their income ratios before the admission of the new partner