FAR2 MR9 - Partnerships

Question 1

Purchase or sale of existing partnership interest (outside partnership transaction)

Answer 1

No journal entry on partnership books, except the a name change on the capital account.

Question 2

Partnership Contributions

Answer 2

1. Assets are valued at FV (GAAP or Tax)
   * GAAP rule = FV of asset contributed
   * *Tax rule = NBV of asset contributed
2. Liabilities are recorded at PV
3. Partner’s Capital therefore equals the difference between FV of assets contributed less PV of liabilities assumed.

Question 3

New Partnership Interest with Investment of Addtl’ Capital

Answer 3

When a new partnership interest is created with investment in additional capital, the total capital partnership amount does not change, and the purchase price can be equal to, more than, or less than book value. 
Three ways to record:
1. Exact Method
2. Bonus Method
3. Goodwill

Question 4

Exact Method - Equal to Book Value

Answer 4

When the purchase price is equal to book value of the capital account purchased, no goodwill or bonus are recorded.
Rules:
1. Determine the exact amount a new partner will have to pay to get his capital account in the exact proportional interest to the new net assets of the partnership.
2. There is no goodwill/bonus
3. Old partners’ capital account “dollars” stay the same
4. Old partners’ % ownership changes
*CPA test questions relating to the exact method will ask How much does the new partner need to contribute in order to have x % of interest and will not reference goodwill/bonus.

Question 5

Bonus Method - Recognize Intercapital Transfer

Answer 5

When purchase price is more or less than the book value of the capital account purchased, bonuses are adjusted between the old and new partners accounts and do not affect partnership assets.
Rules:
1. Determine total capital and interest to new partner
2. If interest less than amount contributed, bonus to old partner(s)
3. If interest is great than the amount contributed, the bonus to new partner
*Existing partners - when new partner pays more than NBV
**New partner - when new partner pays less than NBV

Question 6

Goodwill Method - Recognized Intangible Asset

Answer 6

Goodwill is recognized based upon the total value of the partnership implied by the new partner’s contribution.
Rules:
1. Compute new “new assets before GW” after admitting new (or paying old) partner
2. Compute new capitalized net asset (total worth) and compare to capitalized net assets with net assets before goodwill
3. The difference is goodwill to be allocated among old partners according to their old partnership profit ratios.

Question 7

Exact, Bonus and Goodwill Summary

Answer 7

Exact
- The incoming partner’s capital account is their actual contribution (you must calculate).
- No adjustment to existing partner’s capital accounts is required
Bonus
- Balance in total capital accounts controls the computation
- The incoming partner’s capital account is their % of partnership total NBV (after their contribution)
- Adjust the existing partner’s capital to balance
Goodwill
- Going in investment controls the computation
- The incoming partner’s capital account is their actual contribution
- Goodwill (implied) is determined based on the incoming partner’s contribution, and shared by the existing partners.

Question 8

Profit & Loss Distribution

Answer 8

Per the partnership agreement, otherwise equally distributed, regardless of their capital amounts.

Unless otherwise stated, all payments for interest on capital, salaries, and bonuses are deducted prior to any distribution in profit and loss ratio. Such payments are paid in full, even in a loss.

Question 9

Withdrawal of a partner

Answer 9

Two methods:

1. Bonus - difference between the partner’s capital balance and the amount paid to buy out is the bonus. Bonus is allocated among the remaining partners in accordance to their profit and loss ratios.
2. Goodwill - record the implied goodwill based on the payment to the withdrawing partner. The implied goodwill is allocated to ALL the partners in accordance to profit and loss ratios.

Question 10

Bonus Method

Answer 10

1. Journal entry to adjust asset to FV (offset is capital)

Asset Adj DB
A Capital CR
B Capital CR
C Capital CR

2. JE to buy out partner (paying more than his capital amount)

A Capital % DB (plug #)
B Capital % DB (plug #)
C Capital 100% (buy him out)
Cash CR

Question 11

Goodwil Method

Answer 11

1. JE to revalue the asset to reflect FV

Asset Adj DB
A Capital %
B Capital %
C Capital %

2. JE to record Goodwill to make withdrawing partner’s capital account equal to payoff

Goodwill DB
A Capital % CR
B Capital % CR
C Capital % CR (get this o the exact amount of buyout)

3. Buyout of partner

C Capital 100% DB
Cash CR

Question 12

Liquidation of Partnership order of asset distribution

Answer 12

1. Creditors, including partners who are creditors (paid first)
2. Partners’ capital (paid last)

Question 13

Losses Considered in Liquidation

Answer 13

1. All possible losses must be provided for in a liquidation prior to a distribution is made. All losses must be considered before any cash is disbursed.
2. Losses in liquidating are charged to partners in accordance with the partnership agreement, absence of the agreement, the losses are distributed equally