F2 - M9 - Partnerships

Question 1

Admission of a partner

Answer 1

admitted by the PURCHASE of existing partnership interest or by INVESTING additional capital into partnership

Question 2

Purchase or sale of “existing partnership”

Answer 2

• Outside partnership transaction
• With consent of all partners, sell partnership to a new partner
• Payment for partnership by new partner goes directly to selling partner
• Retiring partner sells interest in same manner to remaining partners
• NO journal entry made

Question 3

Formation of a partnership

Answer 3

Contributions to a partnership
o Assets = Fair Value;
 GAAP rule = use of FV of asset contributed
 Tax rule = use of NBV of asset contributed
o Liabilities recorded at present value
o Partner’s capital account equals FV Assets minus PV of liabilities assumed

Question 4

Creation of New Partnerships Interest with Investment of additional capital

Answer 4

Exact – Equal to Book Value

Bonus – Purchase price is more or less than BV

Goodwill – Recognized Intangible Asset

Question 5

Creation of New Partnerships Interest with Investment of additional capital - Exact = Equal to Book Value

Answer 5

Purchase price = Book value, no goodwill or bonuses are recorded
Rules
• Determine exact amount to pay for his capital account in exact proportional interest to the new net assets of the partnership
• No goodwill or bonus
• Old partners; capital account dollars stay the same
• Old partners; % ownership change

Question 6

Creation of New Partnerships Interest with Investment of additional capital - Bonus = Purchase price is more or less than BV

Answer 6

To existing partners = new partner pays more
To new partners = new partner pays less
Rules
• Determine total capital and interest to new partner
• If interest less than amount contributed, bonus to old partner
• If interest is greater than amount contributed, bonus to new partner
• B = Bonus = Balance in total capital account controls capital account allocation

Bonus to Existing Partners 
Dr Cash
Cr     A, Capital - Bonus
Cr     B, Capital - Bonus
Cr     C, Capital

Bonus to New Partners
Dr Cash
Dr A, Capital
Dr B, Capital
Cr     C, Capital

Question 7

Creation of New Partnerships Interest with Investment of additional capital - Goodwill = Recognized Intangible Asset

Answer 7

Total value of partnership implied by the new partners contribution
Rules
• New “net assets before GW”
• Meno; Compute new capitalized net assets and compare “capitalized net assets” with Net Assets before Goodwill
• Difference is Goodwill to be allocated to the old partners

Dr Cash
Dr Goodwill 
Cr     A, Capital 
Cr     B, Capital
Cr     C, Capital

Question 8

Profit and Loss Distribution

Answer 8

payment to partners

Partnership accounts may be different from their respective profit and loss rations. Reason for distributions/withdrawals will be at different times and for different reasons.

Question 9

Withdrawal of a Partner

Answer 9

Bonus or Goodwill Method

• Bonus Method; difference of capital account and payment = “Bonus”
• Goodwill Method – Record implied goodwill in the partnership based on the payment with withdrawing partner; allocated to all partners

Question 10

Liquidation of a Partnership

Answer 10

Order of Preference regarding distribution of assets
o Creditors – Paid First
o Partners – Paid Last

Losses considered in liquidation

Convert Noncash Assets

Gain or Loss on Realization; Gain, Loss or Loss resulting in capital deficiency

Capital Deficiency; Right of Offset = Use their loan account