Partnership :?

Question

In the problem below:

A and B's combined capital is $50,000. C comes in with cash of $100,000 for 1/3 interest.

Should we say that the book value of the partnership is undervalued, or the old partners receive bonuses?

What is the easiest way to spot if a partnership transactions involves Bonus (to who? old partners or new) or Goodwill?

Thank's

Answer 1

Partners can be admitted into a partnership by either 1) purchasing an interest of the firm from a current partner, or 2) contributing assets to the business, as in this case. When a new partner contributes assets to a business, both assets and owners' equity increase. Either the new partner or the former partners may be entitled to a bonus or goodwill. The bonus or goodwill is determined by BARGAINING between members of a partnership (i.e. there is no hard and fast rule as to who SHOULD get the bonus or goodwill). Goodwill is recorded as an asset, and is credited to the proper capital accounts. In practice, goodwill in the books is avoided due to the murky and often changing accounting standards relating to it.

If the buyer manages to get a share of the partnership for less than it is worth, he has bought the share at a discount. The old partners are debited for the difference in what was paid for the share and what it was actually worth. They divide the investment according to the ratio decided at the START of the business. If the buyer paid at a premium (more than the share was worth), the old partners would be credited in their capital accounts according to their already existing ratio.