Section 28 - Partnerships

Question 1

What does the Equity Section of Partnership Accounting identify?

Answer 1

The capital balances of each partner only – does not distinguish between capital and retained earnings

Question 2

What are assets, liabilities, capital contribution with a mortgage value at in a Partnership formation?

Answer 2

Assets - Fair value

Liabilities - present value

Capital contribution with a mortgage - contributing partner’s capital account is credited for fair value of asset less the mortgage

Question 3

How are allocation of equity for Partnership operation allocated?

Answer 3

Partners are credited for contributions and debited for distributions. In 3 steps:

1) ALLOCATED INTEREST on the average capital balance they maintain during the year
2) One ore more partners may be allocated a FIXED SALARY for services rendered to the partnership
3) REMAINING INCOME or LOSS is allocated based on partnership agreement

Question 4

What are the three methods to admit a new partner?

Answer 4

1) Bonus Method
2) Goodwill Method
3) Exact Method

Question 5

How do you calculate the New Partner’s Capital using the Bonus Method when admitting a new partner?

Answer 5

Old partnership equity
+ New partner contribution
= New partnership equity

New partnership equity
x New partner %
=New partner equity amount

New partner contribution
- New partner equity amount
= Bonus to be allocated to old partners

JE
Cash from new partner
New partner’s capital
Old partner’s capital (bonus)

Question 6

How do you calculate the New Partner’s Capital using the Goodwill Method when admitting a new partner?

Answer 6

New contribution / New equity % = Implied value of partnership (or multiply if given fraction)

Implied value of partnership
- Capital accounts of ALL partners
= Goodwill to old partners

JE
Cash from new partner
Goodwill
   New partner's capital (amount he paid to join)
   Old partner's capital (Goodwill)

Question 7

How do you calculate the New Partner’s Capital using the Exact Method when admitting a new partner?

Answer 7

Old partners equity / old partners % = Implied new value of partnership

Difference between old equity and new implied value of partnership is the contribution amount for the new partner

JE
Cash
New partner’s capital