Question 1

Although the admission of new partner does not result in the dissolution and winding up of the previous partnership, the goodwill method views the admission of a new partner as an opportunity to: revalue net assets as though a new entity had been create

Accepted Answer

The admission of a new partner allows for the revaluation of net assets as though a new entity had been created. This means that the values of the assets and liabilities are adjusted to their fair market value, which may result in an increase or decrease in the value of the partnership's net assets. This revaluation is necessary because the admission of a new partner changes the ownership structure of the partnership and the new partner is entitled to a share of the partnership's assets and liabilities. Therefore, choice D, revaluing net assets, is the best answer.

Question 2

In the Goodwill method of recognizing the admission of a new partner which of the following is likely to happen:

Accepted Answer

In the Goodwill method, the new partnership is recognized at fair market value which means the book value and fair market value are both recognized. However, the difference between the fair market value and the book value is recorded as "goodwill". Therefore, option D is the best choice.

Question 3

In the BONUS method of partnership recognition existing book values should be:

Accepted Answer

In the BONUS method, existing book values are not adjusted to current values. Instead, the bonus is allocated based on the ratio of the additional investment made by the new partner to the sum of the existing book values.

Question 4

The propriety theory of partnership, which views this form of entity as:

Accepted Answer

The proprietary theory of partnership defines it as a group of individual investors who come together to carry out a business activity. Each partner has a share in the profits and losses of the enterprise. Therefore, option B is the correct answer. Option A is incorrect because partnerships are formed by individuals who want to work together as a team, not separately. Option C is incorrect because partnerships can have multiple managing partners. Option D is also incorrect as partners in a partnership are not typically paid a salary.

Question 5

The entity theory of partnership conceptually suggests that the partner-ship entity should continue if a partner is:

Accepted Answer

The entity theory of partnership suggests that a partnership is an independent and separate entity apart from the individual partners. As a result, the partnership should continue even if a partner is dissociated, as long as the remaining partners agree to continue the partnership. So, choice D is correct. Options A, B, and C are incorrect as they do not relate to the concept of partnership entity theory.

Question 6

The withdrawal of a partner requires a determination of the fair value of the partnership entity and a measurement of:

Accepted Answer

The withdrawal of a partner requires a measurement of the partnership income up to the date of withdrawal (which would include revenue and expenses) in order to determine the partner's share of the fair value of the partnership entity. However, cash is not necessarily relevant to this calculation.

Question 7

The book-value approach of the bonus method does not directly recognize increases in asset values suggested by the consideration that the incoming partner pays.However, the method does indirectly recognize:

Accepted Answer

The book-value approach of the bonus method adjusts the capital balances to indirectly recognize the increase in asset values suggested by the consideration paid by the incoming partner.

Question 8

When the new partner invests some intangible asset, such as business acumen or an established clientele, it is possible to have a bonus credited to the new partner.This bonus may be viewed as:

Accepted Answer

The bonus credited to the new partner is a cost incurred to acquire the intangible asset they bring to the partnership, which is their business acumen or established clientele. This cost is reflected in the Goodwill account on the balance sheet, which represents the value of the business beyond its tangible assets.

Question 9

If objective evidence supports the write-down of existing assets, the previous partners' capital balances would be reduced accordingly in proportion to

Accepted Answer

According to the partnership agreement, the partners' capital balances are determined based on their capital investment and profit and loss ratios. Therefore, if objective evidence supports the write-down of existing assets, the partners' capital balances would be reduced in proportion to their profit and loss ratios. This ensures that each partner bears the impact of the asset write-down based on their respective contribution to the partnership's profit and loss.

Question 10

If differences between the fair value and the book value of recorded assets are identiﬁable, appropriate adjustments to asset balances should be considered.Since a change in ownership structure creates a new, distinct legal entity, every attempt should be made to identify differences between fair and:

Accepted Answer

Differences between fair value and book value of recorded assets are crucial for accurate financial reporting and asset valuation. When ownership changes, identifying these differences ensures that the new entity's financial statements reflect the true value of its assets.

Question 11

When an incoming partner's contribution is different from that indicated by the book values of the original partnership, the admission of the partner, which method may be used to record the admission:

Accepted Answer

The Goodwill method would be the best choice in this situation as it recognizes the difference between the book value of the partnership and the actual value of the incoming partner's contribution. Goodwill is calculated as the excess of the total value of the partnership above its book value, and this excess amount is allocated among the partners according to their profit and loss sharing ratio. This method ensures that the incoming partner is credited for the additional value they bring to the partnership, and the existing partners’ capital accounts are adjusted accordingly.

Question 12

Assuming a new partner has been approved by the existing partners, the new partner, normally, will experience the same general risks and rights of ownership as do the other existing partners.A new partner is liable for all of the obligations of a partnership that arose before their admission except:

Accepted Answer

A new partner is liable for all obligations of the partnership that arose before their admission, but these obligations can only be paid out of the partnership assets and not the personal assets of the new partner. This is known as limited liability, which is one of the benefits of being a partner in a limited partnership. Options B, C, and D are incorrect because personal assets of the new partner and obligations of previous partners are not exempt from liability, and non-personal assets of existing partners are still subject to potential liability.

Question 13

A new partner also may be admitted to the partnership by acquiring all or part of the capital interest of one or more existing partners in exchange for some consideration (assets).In this case, the new partner deals directly with

Accepted Answer

The answer of A new partner also may be admitted...

Question 14

It may be argued that the difﬁculties associated with the measurement of the fair value of existing assets unjustiﬁably forces:

Accepted Answer

The difficulties in measuring the fair value of existing assets can lead to the recognition of goodwill, as it represents the excess value paid over the fair value of identifiable net assets.

Question 15

Recording a write down from an original partner's capital of book value to its implied fair market value would involve a debit to which account:

Accepted Answer

Recording a write down from an original partner's capital of book value to its implied fair market value would involve a debit to the partner's capital account. This is because the change in value affects the partner's capital balance, and therefore, must be reflected in that account.

Question 16

If a new partner were to purchase 99% of an existing partner's share of a business which account would be debited:

Accepted Answer

When a new partner purchases a share from an existing partner, the existing partner's capital account is debited to reflect the reduction in their ownership stake.

Question 17

An incoming partner may acquire an interest in the partnership for a price in excess of that indicated by the book value of the original partnership's net assets.This situation would suggest the existence of:

Accepted Answer

The situation described indicates that the incoming partner is paying more than the book value of the partnership's net assets, which suggests the presence of intangible value that is not reflected in the recorded financial statements. This intangible value is known as goodwill, and it represents the reputation, customer loyalty, and other non-tangible assets that contribute to the partnership's profitability. Therefore, the correct choice is C) Unrecognized Goodwill.

Question 18

It is possible that an incoming partner may acquire an interest in the partnership at a price less than that indicated by the book value.This situation would suggest the existence of:

Accepted Answer

If the incoming partner acquires an interest in the partnership at a price less than book value, it suggests that the recorded net assets of the partnership may have been impaired and their value has decreased below their book value. As a result, the partnership would need to recognize a write-down on the recorded net assets to reflect their decreased value, which offsets the other partners' net worth in the business.

Question 19

Assuming there are no differences between the fair value and book value of recorded assets, the new partner's willingness to pay more than the proportionate book value of the new entity indicates

Accepted Answer

If the new partner is willing to pay more than the proportionate book value of the new entity, it indicates that there is existing goodwill. Goodwill is an intangible asset that arises when a company is valued at a price greater than the fair value of its identifiable assets and liabilities. Therefore, the willingness to pay above the book value suggests that the new partner perceives future economic benefits beyond those that are recorded on the balance sheet, which can be attributable to goodwill.

Question 20

When a new partnership is formed and Goodwill is recognized what should follow:

Accepted Answer

Recognition of Goodwill means that the total value of partnership assets exceeds the total value of partnership liabilities. This leads to re-evaluation of net assets, which means that the difference between the existing book value of assets and liabilities should be adjusted, and the partners' capital accounts should be revalued accordingly.

Quiz 14: Partnerships: Ownership Changes and Liquidations