When partners leave a partnership, they typically receive payment for their share. The payment should (will) be at fair market value. Since this transaction establishes or reaffirms a value for the partnership, the partnership may record goodwill on its books.

Suppose that we have the following capital balances relating to a partnership:

Partner Capital Balance Profit/Loss Ratio

A $ 40,000 50%

B $ 40,000 25%

C $ 20,000 25%

$100,000

The partnership has agreed that when a partner leaves the partnership, s/he will receive cash (or other assets) equal to their current capital balance plus their share of any adjustment indicated by the fair value at the time the partner leaves.

Partner C leaves the partnership when the partnership has an appraised value of $140,000.

1. the bonus method?
2. the goodwill method?

Now assume that the appraised value of $140,000 includes land that is worth $20,000 more than its original cost.

1. the goodwill method?
2. the “hybrid” method?

Answer rating: 100% (QA)

1Bonus Method When using the bonus method the partnership adjusts the capital balances of the remaining partners based on the proportionate increase i... View the full answer