ACT 506 Module 6
Memorandum
TO: BGA Partnership
FROM: Student Name
DATE:
SUBJECT: Partnerships Accounting
Partnerships are a critical business venture whose provisions allow for the collective pooling of resources, skills, and talents in the pursuit of profits. As a separate business entity, adopted accounting strategies have implications that affect all members of the partnership. State business regulations modeled after the Uniform Partnership Act of 1997 allow BGA Partnership to adopt new members. The critical nature of the distribution of new partner investment, net income or loss share, and share of ownership capital warrants the application of favorable accounting strategies. Three accounting methods are universal in accounting for new partners, within which BGA partners stand divided. The following are the three methods and the implicate effect on the partnership capital if applied.
Bonus Method
Bill stands supportive of the bonus method in calculating capital balances in admitting Newt to the BGA Partnership. The position delineates Bill’s position against recognizing goodwill or recording adjustments in liability and asset accounts. The method takes into account the capital interests purchased and the partnership book value. If this method is applied, Newt’s investment will be equated against BGA book value to determine the amount and direction of the bonus paid. Two instances present as possible outcomes under this method. First, if Newt’s investment purchase of the capital interests surpasses BGA book value, the difference will be paid to Bill, George, and Ann as a bonus as per their profit and loss ratios. Liability and asset distribution remain the same, but as a factor of the new member, contribution added to the book value of existing equity. The bonus will be allocated to Newt if his investment is lower than the book value of capital interests purchased, Under this method, Newt’s share of capital is calculated as follows
Goodwill Method
Similar to the bonus method, the goodwill method acknowledges the relationship between new partner investment and the book value of purchased capital interests. The goodwill method allows the debiting of a new member’s capital account investment and the respective goodwill share. If the investment does not equal the book value of capital interests, the difference is debited to the partner’s account as intangible goodwill. The method necessitates the creation of a goodwill account and the debit entry of a goodwill amount. Old partners receive are credited proportionate shares to their profit and loss ratios. The goodwill method asserts a difference between the book value and the market value of the net partnership assets. The goodwill is calculated as a factor of estimated total capital investments and net assets.
Revaluation Method
Revaluing in the instance of admitting a new partner takes into account numerous factors. Primarily, the method exempts the new partner from the benefits or implications of appreciation or decline of asset and liabilities value up to the date of admission. Net liabilities and assets are revalued before the admission of new partners. Old partners are credited or debited proportionate shares of the profits or losses with respect to their ratios. When new partners are admitted, the book value of existing net assets is raised to the corresponding market value. Additionally, unrecognized goodwill is recorded, and the capital accounts are updated to reflect the revaluation. BGA's total capital, therefore, would include capital balances, Newt’s investment, and the amount of asset revaluation.
The accounting method adopted has to reflect a consensus among the old partners. Although all three are applicable, the partners need to settle on one that best represents a consensual distribution of net income or loss share and share of ownership capital against investment.