Question

Pam and John are partners in PJ’s partnership, having capital balances of $120,000 and $40,000, respectively, and share income in a ratio of 3:1. Gerry is to be admitted into the partnership with a 20 percent interest in the business.

Required

For each of the following independent situations, first record Gerry’s admission into the partnership and then specify and briefly explain why the accounting method used in that situation is GAAP or non-GAAP.

1. Gerry invests $50,000, and goodwill is to be recorded.
2. Gerry invests $50,000. Total capital is to be $210,000; the partners use the bonus method.
3. Gerry purchases the 20 percent interest by directly paying Pam $50,000. Gerry is assigned 20 percent interest in the partnership solely from Pam’s capital account.
4. Gerry invests $35,000. Total capital is to be $195,000; the partners use the bonus metho
5. Gerry invests $35,000, and goodwill is to be recorded.
6. Gerry invests $35,000. During the valuation process made as part of admitting the new partner, the partnership’s inventory is determined to be overvalued by $20,000 because of obsolescence. PJ’s partnership uses the lower-of-cost-or-market value method for inventories.

Answer 1

Solution a Gerry invests $50,000 and goodwill is to be recorded:

solution b Gerry invests $50,000; total capital is to be $210,000:

solution c Direct purchase from Pam; thus, only reclassify capital:

solution d Gerry invests $35,000: total capital to be $195,000: