Admission of a Partner
Pam and John are partners in the PJ's partnership, having capital balances of $120,000 and $40,000, respectively, and share income in a ratio of 3:1. Gerry is to be admitted into the partnership with a 20 percent interest in the business.
For each of the following independent situations, first, record Gerry's admission into the partnership and, second, specify and briefly explain why the accounting method used in that situation is GAAP or non-GAAP.
a. Gerry invests $50,000, and goodwill is to be recorded.
b. Gerry invests $50,000. Total capital is to be $210,000.
c. Gerry purchases the 20 percent interest by directly paying Pam $50,000. Gerry is assigned 20 percent interest in the partnership solely from Pam's capital account.
d. Gerry invests $35,000. Total capital is to be $195,000.
e. Gerry invests $35,000, and goodwill is to be recorded.
f. Gerry invests $35,000. During the valuation process made as part of admitting the new partner, it is determined that the partnership's inventory is overvalued by $20,000 because of obsolescence. PJ's partnership uses the lower-of-cost-or-market value method for inventories.
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