@mckan514w – Third one – partnerships – there are three methods for calculating basis for a new partner.
Exact method – when the new partner's share is equal to his/her book value coming in – straight and simple
Bonus method – bonus can go to new partner OR to existing partners! mnemonic Bonus = Balance in total cap accounts controls allocation
– if the new partner pays more than would be his/her percent ownership in the entity, part of his/her contribution is given to the existing partners as bonuses, in proportion to their profit/loss ratio
– if the new partner pays less than would be his/her percent ownership, bonus comes from the existing to the new, again according to profit & loss ratio.
Goodwill method – mnemonic Goodwill = Going in investment controls cap accounts & goodwill calculation. The new partner's contribution (greater than his/her NBV) implies a total value for the partnership – say I put in 35,000 for 1/3 ownership, that implies the whole entity's value is 105,000. Add up the partners' capital and subtract from the new total value, that's the goodwill added. That goodwill then gets credited t the capital accounts of the existing partners by their profit & loss ratios. Journal entry for that one (hopefully it clarifies) when existing partners have A 30,000 and B 10,000 with a 60:40 ratio:
DR Cash incoming ________________ 35,000
DR Goodwill _____________________ 30,000
……CR A Capital (60% x 30,000) _________ 18,000
……CR B Capital (40% x 30,000) _________ 12,000
……CR C Capital (new guy) ______________ 35,000
This looks kinda like the bonus method with bonus to existing partners, but it adds value instead of distributing the existing money.
Hope that helps rather than confuses…
.