Partnerships

Question 1

How is the bonus method for partnerships applied?

Answer 1

BAR - Bonus Adjust the Right
Total partnership capital = new partner’s $ contribution + existing partners value
Compare % bought to $ contribution
Adjust existing partner balances by difference

Question 2

How is the goodwill method for partnerships applied?

Answer 2

GAL - Goodwill Adjust the Left
Total partnership capital = new partner contribution / new partner ownership %
Difference between implied value and actual value is goodwill
Adjust existing partner balances by difference

Question 3

How is the exact method for partnerships applied?

Answer 3

Make contribution = % bought

Existing partnership balance / existing partnership ownership

Question 4

What are steps to liquidate partnership?

Answer 4

1. Allocate any income/loss to the partners’ capital accounts on the basis of their P/L ratio
2. All noncash assets are sold and converted to cash
3. Pay creditors
4. Distribute remaining cash to the remaining partners in accordance with the balance in their capital accounts. Note that this is not necessarily the P/L ratio.