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Exercise 2 - Accounting for a New Partner
OTC Partnership has three existing partners with capital accounts and profit splits as follows:
Partner	Capital Balance		Profit Interest
A	$500,000		20%
B	1,500,000		30%
C	1,000,000		50%
	$3,000,000		100%
If OTC admits a new partner, under each of the following scenarios how is the entry booked?
Scenario 1: New Partner D contributes $3,000,000 for a 50% capital share of the firm.
$3,000,000 / 50% implies a FMV of $6,000,000
Total new capital = $3,000,000 + $3,000,000 = $6,000,000
	Account			D	C
	Assets (contributed by D)
		Capital - D
Scenario 2: New Partner D contributes $4,000,000 for a 50% capital share of the firm. The firm
uses the bonus method of accounting for new partners.
$4,000,000 / 50% implies a FMV of $8,000,000
Total new capital = $3,000,000 + $4,000,000 = $7,000,000
New Partner Capital Balance = (BV Original + New Contribution) x New Partner %
New Partner Capital Balance = ($3,000,000 + $4,000,000) x 50%
New Partner Capital Balance = $7,000,000 x 50% = $3,500,000
	Account			D	C
	Assets (contributed by D)
		Capital - A
		Capital - B
		Capital - C
		Capital - D
Scenario 3: New Partner D contributes $4,000,000 for a 50% capital share of the firm. The firm uses
the goodwill method, and any excess over FMV is attributable to existing goodwill.
$4,000,000 / 50% implies a FMV of $8,000,000
Total new contributed capital = $3,000,000 + $4,000,000 = $7,000,000
$1,000,000 difference = Goodwill
Total New Capital = $3,000,000 + $4,000,000 + $1,000,000 = $8,000,000
	Account			D	C
	Assets (contributed by D)
	Goodwill
		Capital - A
		Capital - B
		Capital - C
		Capital - D
Scenario 4: New Partner D contributes $500,000 for 25% share of the firm. The firm uses the bonus
method, and any bonus is attributable to the new partner.
$500,000 / 25% implies a FMV of $2,000,000
Total new capital = $3,000,000 + $500,000 = $3,500,000
New Partner Capital Balance = (BV Original + New Contribution) x New Partner %
New Partner Capital Balance = ($3,000,000 + $500,000) x 25%
New Partner Capital Balance = $3,500,000 x 25% = $875,000
	Account			D	C
	Assets (contributed by D)
	Capital - A
	Capital - B
	Capital - C
		Capital - D

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