FARE 10 Partnerships

Question 1

Admission of a partner

Answer 1

by purchase or sale of existing partnership interest. No journal entry

Question 2

Formation of a partnership

Answer 2

1. Assets are valued at fair value
2. Liabilities assumed are recorded at their present value.
3. Partner’s capital account = FV contributed assets - PV liabilities assumed

Question 3

Creation of a new partnership interest with investment of additional capital

Answer 3

1. Exact method - equal to book value
2. Bonus method - to existing partners or new partner
3. Goodwill method - recognized intangible assets

Question 4

Creation of a new partnership interest with investment of additional capital.
EXACT METHOD

Answer 4

1. The incoming partner’s capital account is their actual contribution.
2. No adjustment to the existing partner’s capital accounts is required.

Question 5

Creation of a new partnership interest with investment of additional capital.
BONUS METHOD

Answer 5

1. Balance in total capital accounts controls computation.
2. The incoming partner’s capital account is their % of the partnership total NBV
3. Adjust the existing partner’s capital accounts to balance

Question 6

Creation of a new partnership interest with investment of additional capital.
GOODWILL METHOD

Answer 6

1. Going investment controls the computation
2. The incoming partner’s capital account is their actual contribution.
3. Goodwill is determined based on the incoming partner’s contribution and shared by existing partners

Question 7

Profit and loss distribution

Answer 7

All interest, salaries and bonuses are deducted from total profit to arrive at the amount of profit and loss distributed in the profit and loss ratio.

Question 8

Withdrawal of a partner.

Answer 8

1. Bonus method

2. Goodwill method.