Partnership Accounting

Question 1

At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?

Answer 1

Fair Value for assets contributed.

Present value of remaining cash flows for liabilities assumed.

Question 2

How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

Answer 2

Unlike in Regulation where the partner’s tax basis is reduced by the amount of the mortgage that the other partners absorb- calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability

Example: If you contribute a $100-000 building with a 20-000 loan- your capital account is increased by $80-000- instead of allocating the liability to the other partners according to their ownership %.

Question 3

If no goodwill is recorded upon admission of a new partner- which method is used for recording the new partner’s interest?

Answer 3

The bonus method:

Old Partnership Equity
\+ New Partner Contribution
= New Partnership Equity
x New Partner %
= New Partner Equity Amount

New Partner Contribution
- New Partner Equity Amount
= Bonus to Prior Partners using same allocation as P/L

Question 4

If goodwill is recorded upon admission of a new partner- how is the partner’s interest recorded?

Answer 4

Using the goodwill method:

New Contribution / New Equity % = Partnership Value

Implied Value of Partnership
- Capital Accounts of all partners
= Goodwill to Old Partners

Under the Goodwill Method- the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake- then it is assumed that the Partnership is worth $4-000 ($1-000/25%)