You are providing accounting services for the JR Company partnership. The two partners, Jason and Richard, are thinking of adding a third partner to their business, and they have several questions regarding the use of GAAP for their partnership.
Prepare a memo for the partners addressing each of their questions.
a. Why are salaries to partners not shown on the partnership's income statement prepared using GAAP?
b. Why should the partnership use GAAP to account for the admission of a new partner? Why is it not preferable for the partnership to recognize holding gains on its long-lived assets at the time of admitting the third partner? (The two partners argue that recognizing these gains now would allocate them to the partners who were growing the business prior to a new partner's admission.)
c. Why should the partners and the partnership fully analyze all the partnership's liabilities to ensure that there are no unrecognized liabilities when a new partner is admitted? (The two partners feel this is an unnecessary cost because an unpaid supplier will simply send another bill in the future.)