Please enable JavaScript.
Coggle requires JavaScript to display documents.
Partnership Accounting (Formation of a New Partnership (Capital…
Partnership Accounting
Formation of a New Partnership
Contributed Assets
Fair Value
Liabilities assumed
Present Value of remaining cash flows
We know the Future Value of remaining cash flow owed
We need to convert it into the Present Value for liabilities
Capital Contributions with a Mortagage
Unlike REG where partner's tax basis is reduced by amount of mortgage OTHER partners absorb, the FULL balance goes to the partner
I.e Asset FV - Liability; No prorata required
i.e. Contribute 100k building with a 20k loan, capital account is increased by 80k instead of allocating liability to the other partners according to ownership %
Admission of a New Partner
Bonus Method
Use if No Goodwill is recorded
Get New Total Partnership Equity
Old Partnership Equity
+New Partner Contribution
= New Partnership Equity
Get New Partner portion of Equity
New Partnership Equity
*New Partner %
= New Partner Equity Amount
Bonus to Old Partners using using P/L ratios
New Partner Contribution
-New Partner Equity Amount
=Bonus
Example: Current Capital: (A,B,C) 60k
New Capital (D) 30k
Interest purchased 20%
Total new partnership Equity: 60k+30k = 90K
New Partner Equity Amount: 90k * 20% = 18k
3.Bonus = 30k - 18k = 12k
Bonus is like a plug
Dr. Cash from New partner 30k
Cr. New Partner equity amount 18k
Cr. Bonus to Old partners 12k
Goodwill Method
New partner pays a certain percentage created implied value
New Contribution/New Equity % = Partnership Value
i.e. if they pay 1k for 25% stake, it is assumed the partnership is worth 4k (1k/25%)
Implied Value of Partnership
-Capital Accounts of all partners
= Goodwill to Old partners
4k - (old + new partner capital) = Bonus
If Old partner capital is 2.5k then, 4k - (1k+2.5k) = 500 goodwill split between the old partners based on their P/L ratios