Partnership

Question 2

At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?

Answer 2

Fair Value for assets contributed.

Present value of remaining cash flows for liabilities assumed.

Question 3

How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

Answer 3

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 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
\+ 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 goodwill is recorded upon admission of a new partner, how is the partner’s interest recorded?

Answer 5

Using the goodwill method:

New Contribution / New Equity % = Partnership Value

Implied Value of Partnership
- Capital Accounts of all partners
= 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 $1000 for a 25% stake, then it is assumed that the Partnership is worth $4,000 ($1,000/25%)