Partnership Accounting

Question 1

What methods exist to account for the admission of a new capital partner or capital contribution?

Answer 1

• Equity method (purchase price = book value)
• Bonus method (purchase price ≷ book value)
• Goodwill method (purchase price ≷ book value)

Question 2

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

Answer 2

Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability

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 $1,000 for a 25% stake - then it is assumed that the Partnership is worth $4,000 ($1,000/25%)

Question 5

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

Answer 5

Assets are valued at fair value.

Liabilities assumes are recorded at their present value.