Question: Exercise 2 - Accounting for a New Partner OTC Partnership has three existing partners with capital accounts and profit splits as follows: Partner Capital Balance
| Exercise 2 - Accounting for a New Partner | |||||||||
| OTC Partnership has three existing partners with capital accounts and profit splits as follows: | |||||||||
| Partner | Capital Balance | Profit Interest | |||||||
| A | $500,000 | 20% | |||||||
| B | 1,500,000 | 30% | |||||||
| C | 1,000,000 | 50% | |||||||
| $3,000,000 | 100% | ||||||||
| If OTC admits a new partner, under each of the following scenarios how is the entry booked? | |||||||||
| Scenario 1: New Partner D contributes $3,000,000 for a 50% capital share of the firm. | |||||||||
| $3,000,000 / 50% implies a FMV of $6,000,000 | |||||||||
| Total new capital = $3,000,000 + $3,000,000 = $6,000,000 | |||||||||
| Account | D | C | |||||||
| Assets (contributed by D) | |||||||||
| Capital - D | |||||||||
| Scenario 2: New Partner D contributes $4,000,000 for a 50% capital share of the firm. The firm | |||||||||
| uses the bonus method of accounting for new partners. | |||||||||
| $4,000,000 / 50% implies a FMV of $8,000,000 | |||||||||
| Total new capital = $3,000,000 + $4,000,000 = $7,000,000 | |||||||||
| New Partner Capital Balance = (BV Original + New Contribution) x New Partner % | |||||||||
| New Partner Capital Balance = ($3,000,000 + $4,000,000) x 50% | |||||||||
| New Partner Capital Balance = $7,000,000 x 50% = $3,500,000 | |||||||||
| Account | D | C | |||||||
| Assets (contributed by D) | |||||||||
| Capital - A | |||||||||
| Capital - B | |||||||||
| Capital - C | |||||||||
| Capital - D | |||||||||
| Scenario 3: New Partner D contributes $4,000,000 for a 50% capital share of the firm. The firm uses | |||||||||
| the goodwill method, and any excess over FMV is attributable to existing goodwill. | |||||||||
| $4,000,000 / 50% implies a FMV of $8,000,000 | |||||||||
| Total new contributed capital = $3,000,000 + $4,000,000 = $7,000,000 | |||||||||
| $1,000,000 difference = Goodwill | |||||||||
| Total New Capital = $3,000,000 + $4,000,000 + $1,000,000 = $8,000,000 | |||||||||
| Account | D | C | |||||||
| Assets (contributed by D) | |||||||||
| Goodwill | |||||||||
| Capital - A | |||||||||
| Capital - B | |||||||||
| Capital - C | |||||||||
| Capital - D | |||||||||
| Scenario 4: New Partner D contributes $500,000 for 25% share of the firm. The firm uses the bonus | |||||||||
| method, and any bonus is attributable to the new partner. | |||||||||
| $500,000 / 25% implies a FMV of $2,000,000 | |||||||||
| Total new capital = $3,000,000 + $500,000 = $3,500,000 | |||||||||
| New Partner Capital Balance = (BV Original + New Contribution) x New Partner % | |||||||||
| New Partner Capital Balance = ($3,000,000 + $500,000) x 25% | |||||||||
| New Partner Capital Balance = $3,500,000 x 25% = $875,000 | |||||||||
| Account | D | C | |||||||
| Assets (contributed by D) | |||||||||
| Capital - A | |||||||||
| Capital - B | |||||||||
| Capital - C | |||||||||
| Capital - D | |||||||||
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