Partnerships (F2:M9)

Question 1

when a partnership is formed, how are the following valued?
assets
liabilities
partner’s capital account = ?

Answer 1

A- FV (GAAP Rule); NBV (Tax Rule)
L- present value

= FV of contributed assets - present value of liabilities assumed

Question 2

Exact Method problem-solving steps

Answer 2

determine exact amount a new partner will have to pay to get his capital account in the exact proportional interest to the new net assets of the partnership

no GW or bonus

old partners’ capital account “dollars” stay the same

Question 3

Bonus Method problem-solving steps

Answer 3

determine total capital and the interest to the new partner

if interest less than amount contributed, bonus to old partners

if interest greater than amount contributed, bonus to new partners

*balance in total capital accounts controls the capital account allocation

Question 4

Goodwill Method problem-solving steps

Answer 4

1. determine implied value (amount new partner contributed x 3 if getting 1/3 interest)
2. calculate total partners’ capital accounts (old partners’ capital accounts + amount new partner contributed)

1 - 2 = GW

debit GW and split GW among old partners’ capital accounts for the corresponding credits

Question 5

in accounting for partnership withdrawal, dissolution or admission:
the bonus method…
the goodwill method…

Answer 5

b- increases or decreases individual partners accounts without changing total net assets of the partnership (bc the “bonus” is simply being paid out)

gw- increases individual partners accounts and also changes total net assets of the partnership (bc GW benefits everyone)