Partnership Accounting

Question 1

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

Answer 1

FV of the Asset less the Liability (Mortgage) assumed by the partnership

Question 2

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

Answer 2

The bonus method:

Old Partnership Equity+ New Partner Contribution
: New Partnership Equity
x New Partner %
: New Partner Equity AmountNew Partner Contribution - New Partner Equity Amount
: Bonus to Prior Partners using same allocation as P/L

Question 3

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

Answer 3

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%)

Question 4

What are the two differences between a partnership and a corporation?

Answer 4

1. Partnerships are not taxable entities
2. Equity section does not distinguish between contributed capital and retained earnings in a partnership, but instead identifies the capital balances of each partner.

Question 5

How are assets and liabilities valued at formation of a partnership?

Answer 5

Assets - valued at fair value

Liabilities- assumed are recorded at their PV

Question 6

How is income allocated to partners in a partnership? (3 steps)

Answer 6

1. Partners may be allocated interest on the avg capital balances they maintained during the year.
2. One or more partners may be allocated a fixed salary for services rendered to the partnership.
3. The remaining income or loss is allocated based on the partnership agreement, equally