Chapter 15

Partnerships: Formation, Operation, and Ownership Changes

Multiple Choice

1. When a partner retires and withdraws assets in excess of his book value, the remaining partners
absorb the excess
a. equally.
b. in their profit-sharing ratio.
c. based on their average capital balances.
d. based on their ending capital balances.

2. In a partnership, interest on capital investment is accounted for as a(n)

a. return on investment.
b. expense.
c. allocation of net income.
d. reduction of capital.

3. A partnership in which one or more of the partners are general partners and one or more are not is
called a(n)
a. joint venture.
b. general partnership.
c. limited partnership.
d. unlimited partnership.

4. Which of the following is an advantage of a partnership?

a. mutual agency
b. limited life
c. unlimited liability
d. none of these

5. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of
operation, the partnership incurs a $20,000 loss. The partners should share the losses
a. based on their average capital balances.
b. in a 2 to 1 ratio.
c. equally.
d. based on their ending capital balances.

6. When the goodwill method is used to record the admission of a new partner, total partnership capital
increases by an amount
a. equal to the new partner's investment.
b. greater than the new partner's investment.
c. less than the new partner's investment.
d. that may be more or less than the new partner's investment.
15-2 Test Bank to accompany Jeter and Chaney Advanced Accounting

7. The bonus and goodwill methods of recording the admission of a new partner will produce the same
result if the:
1. new partner's profit-sharing ratio equals his capital interest
2. old partners' profit-sharing ratio in the new partnership is the same relatively as it was in the
old partnership.
a. 1
b. 2
c. both 1 and 2 are met.
d. none of these.

8. When the goodwill method is used and the book value acquired is less than the value of the assets
invested, total implied capital is computed by
a. multiplying the new partner's capital interest by the capital balances of existing partners.
b. dividing the total capital balances of existing partners by their collective capital interest.
c. dividing the new partner's investment by his (her) capital interest.
d. dividing the new partner's investment by the existing partners' collective capital interest.

9. The partnership of Allen and Baden was formed on February 28, 2008. At that date the following
assets were invested:
Allen Baden
Cash $ 90,000 $150,000
Merchandise -0- 240,000
Building -0- 630,000
Furniture and equipment 150,000 -0-

The building is subject to a mortgage loan of $210,000, which is to be assumed by the partnership.
The partnership agreement provides that Allen and Baden share profits or losses 30% and 70%,
respectively. Baden's capital account at February 28, 2008 should be
a. $810,000.
b. $1,020,000.
c. $882,000.
d. $714,000.

Questions 10 and 11 are based on the following balance sheet for the partnership of Amos, Bell, and Cole:

Cash $ 140,000 Liabilities $ 340,000

Other assets 1,000,000 Amos, Capital (40%) 200,000
Bell, Capital (40%) 320,000
Cole, Capital (20%) 280,000
$1,140,000 $1,140,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages.

10. If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dell as
a new 1/5 partner without recording goodwill or bonus, Dell should invest cash or other assets of
a. $285,000.
b. $160,000.
c. $200,000.
d. $228,000.
 Chapter 15 Partnerships: Formation, Operation, and Ownership Changes 15-3

11. If assets on the initial balance sheet are fairly valued, Amos and Bell consent and Dell pays Cole
$150,000 for his interest; the revised capital balances of the partners would be
a. Amos, $210,000; Bell, $330,000; Dell, $300,000.
b. Amos, $210,000; Bell, $330,000; Dell, $280,000.
c. Amos, $200,000; Bell, $320,000; Dell, $300,000.
d. Amos, $200,000; Bell, $320,000; Dell, $300,000.

12. Vicky desires to purchase a one-fourth capital and profit and loss interest in the partnership of Carl,
Greg, and Tim. The three partners agree to sell Vicky one-fourth of their respective capital and
profit and loss interests in exchange for a total payment of $50,000. The payment is made directly
to the individual partners. The capital accounts and the respective percentage interests in profits and
losses immediately before the sale to Vicky follow

Percentage
Capital Interests in
Accounts Profits and Losses
Carl $84,000 50%
Greg 52,000 35
Tim 24,000 15
Total $160,000

All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the
acquisition by Vicky. Immediately after Vicky's acquisition, what should be the capital balances of
Carl, Greg, and Tim, respectively?
a. $63,000; $39,000; $18,000
b. $78,000; $49,500; $22,500
c. $89,000; $55,500; $25,500
d. $104,000; $66,000; $30,000

13. At December 31, 2008, Barb and Kim are partners with capital balances of $150,000 and $90,000,
and they share profits and losses in the ratio of 2:1, respectively. On this date, Adam invests
$75,000 cash for a one-fifth interest in the capital and profit of the new partnership. The partners
agree that the implied partnership goodwill is to be recorded simultaneously with the admission of
Adam. The total implied goodwill of the firm is
a. $15,000.
b. $12,000.
c. $27,000.
d. $60,000.

14. Pete, Joe, and Ron are partners with capital balances of $135,000, $90,000, and $60,000,
respectively. The partners share profits and losses equally. For an investment of $120,000 cash,
Frank is to be admitted as a partner with a one-fourth interest in capital and profits. Based on this
information, the amount of Frank's investment can best be justified by which of the following?
a. Frank will receive a bonus from the other partners upon his admission to the partnership.
b. Assets of the partnership were overvalued immediately prior to Frank's investment.
c. The book value of the partnership's net assets were less than their fair value immediately prior to
Frank's investment.
d. Frank is apparently bringing goodwill into the partnership and his capital account will be
credited for the appropriate amount.
15-4 Test Bank to accompany Jeter and Chaney Advanced Accounting

The following information relates to Questions 15, 16, and 17.

The partnership of Barr, Dole, and Fehr had total capital of $380,000 on December 31, 2008 as follows:

Barr capital (30%) $120,000

Dole capital (45%) 170,000
Fehr capital (25%) 90,000
Total $380,000

Profit and loss sharing percentages are shown in parentheses.

15. If Greer purchases a 25 percent interest from each of the old partners for a total payment of
$180,000 directly to the old partners
a. total partnership net assets can logically be revalued to $720,000 on the basis of the price paid
by Greer.
b. the payment of Greer does not constitute a basis for revaluation of partnership net assets
because the capital and income interests of the old partnership were not aligned.
c. total capital of the new partnership should be $506,667.
d. total capital of the new partnership will be $560,000 assuming no revaluation.

16. Assume that Greer became a partner by investing $100,000 in the Barr, Dole, and Fehr partnership
for a 25 percent interest in capital and profits and that partnership net assets are not revalued. Greer's
capital credit should be
a. $120,000.
b. $95,000.
c. $100,000.
d. $126,667.

17. Assume that Greer became a partner by investing $100,000 in the Barr, Dole, and Fehr partnership
for a 25 percent interest in the capital and profits, and the partnership assets are revalued. Under
this assumption
a. Greer's capital credit will be $100,000.
b. Barr's capital will be increased to $98,000.
c. total partnership capital after Greer's admission to the partnership will be $400,000.
d. net assets of the partnership will increase by $126,667, including Greer's interest.

18. In the absence of an agreement among the partners

a. interest is allowed on capital investments.
b. interest is charged on partners' drawings.
c. interest is allowed on advances to the firm made by partners beyond agreed investments.
d. compensation is allowed partners for extra time devoted to the partnership.

19. The profit and loss sharing ratio should be

a. in the same ratio as the percentage interest owned by each partner.
b. based on relative effort contributed to the firm by the partners.
c. a weighted average of capital and effort contributions.
d. based on any formula that the partners choose.
 Chapter 15 Partnerships: Formation, Operation, and Ownership Changes 15-5

20. The partnership agreement of Foley, Gier, and Hill allows Gier a bonus of 10% of income after the
bonus, salaries of $20,000 per partner and interest of 6% on average capital balances of $80,000,
$100,000, and $120,000 for Foley, Gier and Hill, respectively. The amount of Gier’s bonus,
assuming income before bonus, salaries, and interest of $210,000, is
a. $12,000.
b. $14,667.
c. $13,200.
d. $21,000.

Use the following information in answering Questions 21-22.

Chuck and Bobby are partners operating an electronics repair shop. For 2008, net income was
$30,000. Chuck and Bobby have salary allowances of $54,000 and $36,000, respectively, and
remaining profits and losses are shared 4:6.

21. The division of profits would be:

a. $12,000 and $18,000
b. $30,000 and $-0-
c. $18,000 and $12,000
d. $15,000 and $15,000

22. If their agreement specifies that salaries are allowed only to the extent of income, based on a prorata
share of their salary allowances, the division of profits would be:
a. $12,000 and $18,000
b. $30,000 and $ -0-
c. $18,000 and $12,000
d. $15,000 and $15,000

23. Baskin, Wynn and Morton are partners in a janitorial service. The business reported net
income of $27,000 for 2008. The partnership agreement provides that profits and losses are
to be divided equally after Wynn receives a $30,000 salary, Morton receives a $12,000
salary, and each partner receives 10% interest on his beginning capital balance. Beginning
capital balances were $20,000 for Baskin, $24,000 for Wynn, and $16,000 for Morton.
Morton's share of partnership income for 2008 is:
a. $34,400
b. $18,000
c. $15,600
d. $13,600

24. Bass and Calder are partners who share profits and losses 3:7. The capital accounts on
January 1, 2008 are $90,000 and $120,000, respectively. Dexter is to be admitted as a
partner with a one-fourth interest in the capital and profits and losses by investing $60,000.
Goodwill is not to be recorded. The capital balances after admission should be:
a. Bass, $87,750; Calder, $114,750; Dexter, $67,500
b. Bass, $90,000; Calder, $120,000; Dexter, $67,500
c. Bass, $92,250; Calder, $120,000; Dexter, $60,000
e. Bass, $90,000; Calder, $125,250; Dexter, $60,000
15-6 Test Bank to accompany Jeter and Chaney Advanced Accounting

25. The balance sheet for the partnership of Ott, Pep, and Sup at January 1, 2008 follows. The
partners share profits and losses in the ratio of 3:2:5, respectively.

Assets at cost $480,000

Liabilities $135,000
Ott, capital 75,000
Pep, capital 120,000
Sup, capital 150,000
$480,000

Ott is retiring from the partnership. By mutual agreement, the assets are to be adjusted to
their fair value of $540,000 at January 1, 2008. Pep and Sup agree that the partnership will
pay Ott $135,000 cash for his partnership interest. NO goodwill is to be recorded. What is
the balance of Pep’s capital account after Ott’s retirement?
a. $138,000
b. $108,000
c. $120,000
d. $132,000

Question 26 is based on the following balance sheet for the partnership of Alt, Barr, and Colt:

Cash $ 210,000 Liabilities $ 510,000

Other assets 1,500,000 Alt, Capital (40%) 300,000
Barr, Capital (40%) 480,000
Colt, Capital (20%) 420,000
$1,710,000 $1,710,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages.

26. If the assets are fairly valued on the above balance sheet and the partnership wishes to admit
Dall as a new 1/5 partner without recording goodwill or bonus, Dall should invest cash or
other assets of
a. $427,500.
b. $240,000
c. $300,000
d. $342,000
 Chapter 15 Partnerships: Formation, Operation, and Ownership Changes 15-7

27. Diane desires to purchase a one-fourth capital and profit and loss interest in the partnership of
Fred, Mary, and Don. The three partners agree to sell Diane one-fourth of their respective
capital and profit and loss interests in exchange for a total payment of $125,000. The payment
is made directly to the individual partners. The capital accounts and the respective percentage
interests in profits and losses immediately before the sale to Diane follow

Percentage
Capital Interests in
Accounts Profits and Losses
Fred $210,000 50%
Mary 130,000 35
Don 60,000 15
Total $400,000

All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to
the acquisition by Diane. Immediately after Diane’s acquisition, what should be the capital
balances of Fred, Mary, and Don, respectively?
a. $157,500; $97,500; $45,000
b. $195,000; $123,750; $56,250
c. $222,500; $138,750; $63,750
d. $260,000; $165,000; $75,000

The following information relates to Questions 28 and 29.

The partnership of Dodd, Eddy, and Gore had total capital of $950,000 on December 31, 2008 as
follows:

Dodd capital (30%) $300,000

Eddy capital (45%) 425,000
Gore capital (25%) 225,000
Total $950,000

Profit and loss sharing percentages are shown in parentheses.

28. Assume that Irick became a partner by investing $250,000 in the Dodd, and Gore partnership
for a 25 percent interest in capital and profits and that partnership net assets are not revalued.
Irick’s capital credit should be
a. $300,000.
b. $237,500.
c. $250,000.
c. $316,667.
15-8 Test Bank to accompany Jeter and Chaney Advanced Accounting

29. Assume that Irick became a partner by investing $250,000 in the Dodd, Eddy, and Gore
partnership for a 25 percent interest in the capital and profits, and the partnership assets are
revalued. Under this assumption
a. Irick’s capital credit will be $250,000.
b. Dodd’s capital will be increased to $245,000.
c. total partnership capital after Irick’s admission to the partnership will be $1,000,000.
d. net assets of the partnership will increase by $316,667 including Irick interest.

30. Carlin, Vick and Horton are partners in a janitorial service. The business reported net income
of $81,000 for 2008. The partnership agreement provides that profits and losses are to be
divided equally after Vick receives a $45,000 salary. Horton receives a $18,000 salary, and
each partner receives 10% interest on his beginning capital balance. Beginning capital
balances were $30,000 for Carlin, $36,000 for Vick, and $24,000 for Horton. Horton’s share
of partnership income for 2008 is:
a. $51,600.
b. $27,000.
c. $23,400.
d. $20,400.

Problems

15-1 Vanoy, Hale, & Carter are partners with capital balances of $80,000, $200,000, and $120,000,
respectively. Profits and losses are shared in a 3:2:1 ratio. Hale decided to withdraw and the
partnership revalued its assets. The value of inventory was decreased by $20,000 and the value of
land was increased by $50,000. Vanoy and Carter then agreed to pay Hale $230,000 for his
withdrawal from the partnership.

Required:
Prepare the journal entry to record Hale's withdrawal under the
A. bonus method.
B. full goodwill method.

15-2 Bass and Gore are partners in an automobile repair business. Their respective capital balances are
$255,000 and $165,000, and they share profits in a 3:2 ratio. Because of growth in their repair
business, they decide to admit a new partner. Lane is admitted to the partnership, after which Bass,
Gore, and Lane agree to share profits in a 3:2:1 ratio.

Required:
Prepare the necessary journal entries to record the admission of Lane in each of the following
independent situations:

A. Lane invests $180,000 for a one-fourth capital interest, but will not accept a capital balance of
less than his investment.

B. Lane invests $90,000 for a one-fifth capital interest. The partners agree that assets and the firm
as a whole should be revalued.

C. Lane purchases a 20% capital interest from each partner. Bass receives $60,000 and Gore
receives $30,000 directly from Lane.
 Chapter 15 Partnerships: Formation, Operation, and Ownership Changes 15-9

15-3 Bryant, Norman, and Rich formed a partnership and agreed to share profits in a 3:1:2 ratio after
recognition of 5% interest on average capital balances and monthly salary allowances of $2,500 to
Norman and $2,000 to Rich. Average capital balances were as follows:

Bryant 200,000
Norman 160,000
Rich 120,000

Required:

Compute the net income (loss) allocated to each partner assuming the partnership incurred a
$18,000 net loss.

15-4 Pine and Sloan formed a partnership on January 2, 2008. Sloan invested $120,000 in cash. Pine
invested land valued at $30,000, which he had purchased for $20,000 in 2002. In addition, Pine
possessed superior managerial skills and agreed to manage the firm. The partners agreed to the
following profit and loss allocation formula:
a. Interest —8% on original capital investments.
b. Salary — $5,000 a month to Pine.
c. Bonus — Pine is to be allocated a bonus of 20% of net income after subtracting the bonus,
interest, and salary.
d. Remaining profit is to be divided equally.

At the end of 2008 the partnership reported net income before interest, salaries, and bonus of
$168,000.

Required:
Calculate the amount of bonus to be allocated to Pine.

15-5 Webb and Yates are partners whose capital balances are $240,000 and $180,000 and who share
profits 3:2. Due to a shortage of cash, Webb and Yates agree to admit Zebb to the firm.

Required:
Prepare the journal entries required to record Zebb’s admission under each of the following
assumptions:
(a) Zebb invests $120,000 for a 1/4 interest. The total firm capital is to be $540,000.
(b) Zebb invests $180,000 for a 1/4 interest. Goodwill is to be recorded.
(c) Zebb invests $90,000 for a 1/5 interest. Goodwill is to be recorded.
(d) Zebb purchases a 1/4 interest in the firm, with 1/4 of the capital of each old partner transferred
to the account of the new partner. Zebb pays the partners cash of $150,000, which they divide
between themselves.
15-10 Test Bank to accompany Jeter and Chaney Advanced Accounting

15-6 The partners in the ABC partnership have capital balances as follows:
A. $50,000; B. $50,000 C. $75,000

Profits and losses are shared 30%, 20%, and 50%, respectively.

On this date C withdraws and the partners agree to pay him $100,000 out of partnership cash.

Required:
A. Prepare journal entries to show three acceptable methods of recording the withdrawal.
(Tangible assets are already stated at values approximating their fair market values.)

B. Which alternative would you recommend if you determined that the agreement to pay C
$100,000 was not the result of arms length bargaining between C and the other partners? Why?

15-7 Adair, Bates and Costas are partners who share income in a 5:3:2 ratio. Costas, whose capital
balance is $75,000, retires from the partnership.

Required:
Determine the amount paid to Costas under each of the following cases:

(1) $25,000 is debited to Adair capital account; the bonus approach is used.
(2) Goodwill of $30,000 is recorded; the partial goodwill approach is used.
(3) $33,000 is credited to Bates' capital account; the total goodwill approach is used.

15-8 The partnership agreement of Sells, Moyer, and James provides for annual distribution of profit and
loss in the following sequence:
– Moyer, the managing partner, receives a bonus of 10% of net income.
– Each partner receives 5% interest on average capital investment.
– Residual profit or loss is to be divided 4:2:4.

Average capital investments for 2008 were:

Stone $270,000
Miles $180,000
James $120,000

Required:
A. Prepare a schedule to allocate net income, assuming operations for the year resulted in:
1. Net income of $75,000.
2. Net income of $15,000.
3. Net loss of $30,000.

B. Prepare the journal entry to close the Income Summary account for each situation above.

Short Answer
1. The principal types of partnerships are general partnerships, limited partnerships, and joint ventures.
Describe the characteristics of each type of partnership.
2. There are two methods of recording changes in the membership of a partnership – the bonus method
and the goodwill method. Describe these two methods of recording changes in partnership
membership.
 Chapter 15 Partnerships: Formation, Operation, and Ownership Changes 15-11

ANSWER KEY

Multiple Choice
15-12 Test Bank to accompany Jeter and Chaney Advanced Accounting

1. b 8. c 15. a 21. b
2. c 9. a 16. a 22. c
3. c 10. c 17. d 23. c
4. d 11. d 18. c 24. a
5. b 12. b 19. d 25. c
6. b 13. d 20. a
7. c 14. c
Problems

15-1 A. Hale, Capital $200,000 + (30,000 × 2/6) 210,000

Vanoy, Capital (20,000 × 3/4) 15,000
Carter, Capital (20,000 × 1/4) 5,000
Cash 230,000

B. Goodwill ($20,000 ÷ 2/6) 60,000

Vanoy, Capital 30,000
Hale, Capital 20,000
Carter, Capital 10,000

Hale, Capital 230,000

Cash 230,000

15-2 A. Goodwill [($180,000 ÷ .25) - $600,000] 120,000

Bush, Capital ($120,000 × 3/5) 72,000
Gore, Capital ($120,000 × 2/5) 48,000

Cash 180,000
Lane, Capital 180,000

B. Cash 90,000
Goodwill [($420,000 ÷ .80) - $510,000] 15,000
Lane, Capital 105,000

C. Bass, Capital ($255,000 × .20) 51,000

Gore, Capital ($165,000 × .20) 33,000
Lane, Capital 84,000
15-14 Test Bank to accompany Jeter and Chaney Advanced Accounting

15-3 Bryant Norman Rich Total

Salary --- $30,000 $ 24,000 $ 54,000
Interest $10,000 8,000 6,000 24,000
Residual (48,000) (16,000) (32,000) (96,000)
Total $(38,000) $22,000 $ (2,000) $(18,000)

15-4 B = Bonus to Pine

B = .20(Net Income - interest - salary - bonus)
B = .20($168,000 - [.08($150,000)] - $60,000 – B)
B = .20($96,000 - B)
B = $19,200 - .20B
1.20B = $19,200
B = $16,000

15-5 (a) Cash 120,000

Webb, Capital ($15,000 × .60) 9,000
Yates, Capital ($15,000 × .40) 6,000
Zebb, Capital (1/4 × $540,000) 135,000

(b) Implied goodwill - 1/4X = $180,000; X = $720,000

Goodwill - $720,000 - $600,000 = $120,000

Goodwill 120,000
Webb, Capital 72,000
Yates, Capital 48,000

Cash 180,000
Zebb, Capital 180,000

(c) Implied goodwill - 4/5X = $420,000; X = $525,000

Goodwill: $525,000 - $510,000 = $15,000

Goodwill 15,000
Cash 90,000
Zebb, Capital 105,000

(d) Webb, Capital (1/4 of $240,000) 60,000

Yates, Capital (1/4 of $180,000) 45,000
Zebb, Capital 105,000

15-6 A. 1) C, Capital 75,000

A, Capital 15,000
B, Capital 10,000
Cash 100,000
 Chapter 15 Partnerships: Formation, Operation, and Ownership Changes 15-15

2) Goodwill 25,000
C, Capital 25,000

C, Capital 100,000
Cash 100,000

3) .5X = $25,000
X = $50,000

Goodwill 50,000
A, Capital 15,000
B, Capital 10,000
C, Capital 25,000

C, Capital 120,000
Cash 120,000

B. The bonus method is more objective. That is, the bonus method does not require the allocation
of a subjective value to goodwill. Since this is not an arm's length transaction, there is no
objective basis to revalue the firm as a whole.

15-7 (1) Since a debit was made to Adair's capital account, a bonus was paid to the retiring partner of
$40,000 (5/8 goodwill = $25,000), resulting in a total payment to Costas of $115,000. The entry
would be:
Adair, Capital 25,000
Bates, Capital 15,000
Costas, Capital 75,000
Cash 115,000

(2) Under the partial goodwill approach, only the goodwill attributed to the retiring partner is
recorded. Thus, the payment to Costas was $105,000 ($75,000 + $30,000).

(3) Since $33,000 was credited, total goodwill of $110,000 ($33,000/.3) is recorded. Costas is
allocated $22,000 ($110,000 × .20). Thus, the payment to Costas was $97,000 ($75,000 +
$22,000).

15-8 A. 1. Sells Moyer James Total

Bonus $ --- $ 7,500 $ --- $ 7,500
Interest 13,500 9,000 6,000 28,500
13,500 16,500 6,000 36,000
Residual 15,600 7,800 15,600 39,000
Total $29,100 $24,300 $21,600 $75,000

2.
Bonus $ --- $1,500 $ --- $ 1,500
Interest 13,500 9,000 6,000 28,500
13,500 10,500 6,000 30,000
Residual (6,000) (3,000) (6,000) (15,000)
Total $7,500 $7,500 -0- $15,000
15-16 Test Bank to accompany Jeter and Chaney Advanced Accounting

3.
Bonus $ --- --- --- ---
Interest 13,500 9,000 6,000 28,500
13,500 9,000 6,000 28,500
Residual (23,400) (11,700) (23,400) (58,500)
Total $(9,000) $(2,700) $(17,400) $(30,000)

B. 1. Income Summary 75,000

Sells, Capital 29,100
Moyer, Capital 24,300
James, Capital 21,600

2. Income Summary 15,000

Sells, Capital 7,500
Moyer, Capital 7,500

3. Sells, Capital 9,900

Moyer, Capital 2,700
James, Capital 17,400
Income Summary 30,000

Short Answer
1. In a general partnership, the partners can bind the partnership into contracts – each partner is an agent
of both the partnership and every other partner. The primary difference between a general partnership
and a limited partnership is that general partners are personally liable for the debts of the partnership,
while limited partners are only liable for the amount invested in the partnership.

A joint venture is an arrangement entered into be two or more parties to accomplish a single or limited
purpose for the mutual benefit of the members of the group.

2. Under the bonus method of recording changes in partnership membership, the assets of the partnership
are increased by the amount of the assets invested by the partner being admitted. Any difference
between the assets invested and the credit to the new partner’s capital account is adjusted to the
existing partners’ capital accounts. When a partner withdraws from a partnership, any difference
between the recorded value of the assets withdrawn and the withdrawing partner’s capital account is
adjusted to the remaining partner’s capital accounts.

Under the goodwill method, a new asset is recorded that is based on the difference between the value
implied by the amount of consideration negotiated in the admission or withdrawal of a partner and the
values reported in the partnership books. Under this method, the firm is revalued, using the amount
invested by the new partner or the amount paid to the withdrawing partner.