Practicing Success
What are the accounting implications of admitting a new partner? |
The firm's assets are revalued and goodwill is calculated The firm's liabilities are transferred to the new partner The firm's profits are redistributed among the existing partners The firm's ownership structure remains unchanged |
The firm's assets are revalued and goodwill is calculated |
The correct answer is option 1- The firm's assets are revalued and goodwill is calculated. When a new partner is admitted to a partnership firm, it generally leads to the revaluation of the firm's assets and liabilities. The purpose of revaluation is to ensure that the firm's balance sheet reflects the fair market value of its assets and liabilities at the time of admission. This process involves reassessing the value of the firm's assets, such as land, buildings, inventory, etc., and adjusting their recorded values accordingly. Additionally, the admission of a new partner can result in the calculation of goodwill. Goodwill represents the value of the reputation, customer base, and other intangible assets of the partnership firm. The existing partners may determine the amount of goodwill based on negotiation or by using a specific method, such as the average profits method or capitalization of super profits method. |