Problem

Admission of a PartnerPam and John are partners in the PJ's partnership, having capita...

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.

Required

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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Solutions For Problems in Chapter 15