F5 M4 FAR CPA

Exact Method

When the purchase price of a partnership interest is equal to book value of the capital account purchased, NO goodwill or bonus are recorded

• Determine the exact amount a new partner will have to pay to get their capital account in the exact proportional interest to the new assets of the partnership ←— Must calculate what contribution should be in order for it to match the BV of what they’re buying

• Purchase Price = BV

• No adjustment needed to existing partner’s capital accounts

Bonus Method

When the purchase price is more or less than book value of the capital account purchased, bonuses are adjusted between the old and new partner’s capital accounts and do NOT affect partnership assets; Based off the balance in total capital accounts

• Bonus can either be paid/ received for the new partner or old partner

• Must adjust existing partners’ capital accounts

  • Interest to NEW Partner < Contribution = Bonus (Old Partner)

  • Interest to NEW Partner > Contribution = Bonus (New Partner)

Goodwill Method

Goodwill is recognized based upon the total value of the partnership implied by the new partner’s contribution

• The purchase price can be more than book value

• Based on the Investment going in (dollars) which controls the computation

Profit and Loss Distribution

Income or loss is distributed among the partners in accordance with their agreement

• If agreement is absent:

  • All partners share equally regardless of what their capital account balances are or the amount of time each partner spends on partnership

• All payments for interest on capital, salaries, and bonuses are deducted before any distribution

Liquidation of a Partnership

The process of winding up the affairs of a partnership after dissolution

• Involves the realization of cash from the disposal of the partnership assets and paying off all liabilities to creditors

  • Remainder (if any) is distributed to the partners

Capital Deficiency

A debit balance in a partner’s capital account (Equity account) that indicates the partnership has a claim against the partner

• Partnership has legal right to offset loan account (Partner loaned money to partnership) to satisfy deficiency

• If deficiency still exists, the remaining partners must absorb the deficiency according to their respective profit and loss ratios

• Any partner may pay deficiency in cash directly to the partnership

Partner Liquidation Schedule

Schedule with the objective to distribute case, as it becomes available, to the partners

• It is important than no partner is overpaid or underpaid

• A partnership is NOT completely liquidated until all claims are settled and their affairs wound up