Partnerships
What is the Goodwill method?
increase total capital so that new partner's contribution equals share of total.
See the steps for allocating a new partner using a bonus method
The reallocation is based on the difference between the BV of the capital account acquired and the fair value (FV) of the contribution. If the contribution is more than the capital's BV, a bonus is paid to the old partners, if less, then a bonus is paid to the new partner. The existing partners' old profit and loss ratio is used to allocate any bonus.
Try to solve this problem! The following condensed balance sheet is presented for the partnership of Smith and Jones, who share profits and losses in the ratio of 60:40, respectively: Assets: Other assets$450,000 Smith, loan20,000 Liabilities: Accounts payable$120,000 Smith Capital $195,000 Jones Capital $155,000 The partners have decided to liquidate the partnership. If the other assets are sold for $385,000, what amount of the available cash should be distributed to Smith?
A partnership may agree to cease business operations and liquidate. Several accounting steps are required to dissolve the partnership and distribute its net assets to the partners. In general, partners will receive cash equal to their updated capital accounts. The liquidation process begins with selling the noncash assets and allocating any gain or loss on the sale to the partners based on their profit ratios. After the partnership's debts are satisfied, the remaining cash is distributed to the partners based on their updated capital accounts. If a partner owes money to the partnership (eg, a loan) and does not repay it, the unpaid balance reduces the amount of cash distributed to that partner. In this scenario, no mention is made Smith repaying the loan. Therefore, one can assume it was not repaid, and the amount of the loan will reduce the cash distributed to Smith. Smith will receive $136,000, as calculated below. Things to remember:When a partnership is liquidated, the noncash assets are sold, any gain or loss is allocated to the partners, and the liabilities are paid. The remaining cash is distributed based on the partners' updated capital accounts. Any partner's unpaid loan will reduce the cash paid to that partner.
Can you answer this? When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill's interest exceeded Mill's capital balance. Under the bonus method, the excess
Had no effect on the capital balances of Yale and Lear. Things to remember:When a partner retires, the partnership's assets and liabilities are revalued at fair value to determine the current value of the partner's interest. Under the bonus method, if the retiring partner receives more than the balance in their capital account, the excess is a bonus from the remaining partners. The capital balances of the remaining partners are reduced according to their new profit and loss percentages.
What happens when the partnership assumes the mortgage on a contributed asset?
An exception to the FV treatment occurs if a noncash asset (eg, a building) contributed is subject to a liability (eg, a mortgage) that is assumed by the partnership. In this case, the contributing partner's capital account is credited for the FV of the noncash asset less the present value of the liability. Things to remember:When forming a partnership, each partner contributes cash and/or assets in exchange for an interest in the partnership. Each partner's capital account is credited for the fair value of the assets contributed. If an asset is subject to a liability that the partnership assumes, the fair value is reduced by the present value of the liability.
Understanding the exact method: The following condensed balance sheet is presented for the partnership of Alfa and Beda, who share profits and losses in the ratio of 60:40, respectively: Cash $45,000 Other assets 625,000 Beda, loan 30,000 Accounts payable $120,000 Alfa, capital 348,000 Beda, capital 232,000 The assets and liabilities are fairly valued on the balance sheet. Alfa and Beda decide to admit Capp as a new partner with a 20% interest. No goodwill or bonus is to be recorded. What amount should Capp contribute in cash or other assets?
Answer: $145,000 Things to remember:When the exact method is used to account for the admission of a new partner, the old partners' capital accounts do not change; however, their percent of ownership decreases. The value of the new partnership (P/S) is based on the old partners' new percent of ownership. The new partner must contribute an amount that will achieve the desired initial capital ownership based on the value of the new P/S capital.
Can you solve this problem?! Dunn and Grey are partners with capital account balances of $60,000 and $90,000, respectively. They agree to admit Zorn as a partner with a one-third interest in capital and profits, for an investment of $100,000, after revaluing the assets of Dunn and Grey. Goodwill to the original partners should be
If Zorn is contributing assets of $100,000 for a 1/3 interest in the partnership, the remaining 2/3 owned by the existing partners must be worth $200,000. Dunn and Grey have combined capital balances of $150,000 indicating that there is unrecorded goodwill of $50,000.
Can you solve this? Kern and Pate are partners with capital balances of $60,000 and $20,000, respectively. Profits and losses are divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land valued at $15,000 for a 20% capital interest in the new partnership. Grant's cost of the land was $12,000. The partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant's capital account should be credited for
Things to remember:If the bonus method is used to account for the admission of a new partner, an allocation is required for the difference between the book value (BV) of the capital account acquired and the fair value of the contribution. If the contribution is more than the BV, a bonus is paid to the old partners, if less a bonus is paid to the new partner.
See answer
Things to remember:When a partnership is liquidated, (1) the noncash assets are sold, (2) any gain or loss is allocated to the partners, and (3) the liabilities are paid. The remaining cash is distributed based on the partners' updated capital accounts. Any partner's unpaid loan from the partnership will reduce the cash paid to that partner.
What is the Bonus method for admitting a new partner?
Transfer between partners so that new partner's capital is adjusted to share of total. -Old partners share bonus based on profit and loss ratio prior to admission of new partner.
Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets. Under the bonus approach to adjust the capital accounts, Carr's unidentifiable asset should be debited for... Look for the why
When forming a partnership (P/S), each partner contributes cash and/or other assets in exchange for an interest in the P/S. On the date of contribution, each partner's capital account (ie, equity) is credited for the fair value of the assets. In general, the amount of each partner's capital account (ie, ownership) does not have to be equal (eg, 70% and 30% ownership). Why? However, if the partners agree to divide the initial capital equally, but all the partners do not contribute equal amounts, the difference must be addressed. For example, one partner may have essential skill sets but lacks sufficient assets to contribute. Similar to admitting a new partner to an existing P/S, the bonus method can be used to account for the difference. The partner who contributed more is considered to have paid a bonus to any partner making a lower contribution, resulting in equal capital accounts. The difference is not treated as a debit to an unidentifiable asset, but as an additional credit to the capital account of the partner(s) receiving the bonus (ie, reduce the capital of the partner[s] paying the bonus and increase the capital of the partner[s] receiving the bonus). In this scenario, Abel and Carr agreed to divide the initial capital equally but made unequal contributions ($100,000 and $84,000). Because the bonus method is used, the contributions are totaled and divided by two, resulting in each partner having a capital account of $92,000 ($184,000 / 2). The $8,000 ($92,000 − $84,000) bonus by Abel is not debited to any account (there is no unidentifiable asset), but it is reflected as an increased credit to Carr's capital, as shown below.