Partnership Accounting

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 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 % = Implied Partnership Value

Implied Value of Partnership
- Capital Accounts of all partners (old + new)
= 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 4

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

Answer 4

The bonus method:

Old Partnership Equity (excluding the new partner)
\+ 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 5

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

Answer 5

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 6

Are unidentifiable assets recognized under the Bonus method?

Answer 6

No

Under the bonus method, unidentifiable assets (i.e. goodwill) are NOT recognized. The total resulting capital is the FV of the tangible investments of the partners

No unidentifiable assets would be recognized by the creation of a new partnership

Question 7

How do you calculate the contribution of a new partner if no goodwill or bonus is to be recorded?

Answer 7

If no goodwill or bonus is to be recorded, the formula to determine a new partner contribution amount is:

New Partner interest %
x (Capital balance of old partners + amount to be contributed)

= Amount to be contributed (new partner contribution)

Or you can use the following formula:

Old Partnership Equity
/ Old partners ownership interest AFTER new partner admission

= Total capital after admission of new partner (New Equity)

Total capital after admission of new partner (New Equity)
- Old Partnership Equity

= New Partner contribution