 Hello and welcome to this session. This is Professor Farhad in which we would look at CPA questions that deal with partnership. This topic is covered on the FAR CPA exam as well as an advanced accounting course. Now when I say it's covered in my advanced accounting course, it means if you go to my website farhadlectures.com you go to my advanced accounting, you will have this topic in details cover. So in this session I'll go over the CPA questions kind of you want to know if you know the questions. If you are comfortable with the questions and the answers, then you should be good to go. If you feel you know what I really need to learn a little bit more then you could always go to my website for additional resources. Always I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1700 plus accounting, auditing, finance as well as Excel tutorial. If you like my lectures please like them and share them because if they benefit you it means they might benefit other people. Connect with me on Instagram. As I just mentioned farhadlectures.com I have advanced accounting. You can go there and check out my advanced accounting lessons that will cover this topic. The way I teach on my website is different than a CPA course. I teach as if you are a college students. I teach you the material from scratch. I don't assume you know anything and for many students that's very helpful to their learning style. Let's take a look at the first question. We have Paul and Wilson formed a partnership each contributing assets to the business. Paul contributed equipment with a current value and access of its current market value and access of the carrying value. It means they have a gain on the asset. Wilson contributed land with a carrying value and access of the current value. That's fine too. It means you have a land that's worth 100. You bought it at 100. Now the fair market value is 150. Which of the following should be recorded at which should be recorded at fair value? Basically what equipment land or both. Look when you contribute an asset to the partnership it's recorded at fair market value the tangible asset. Equipment and land are tangible therefore both are recorded at the tangible at the fair market value whatever their fair market value is. D and Z formed the DZ partnership on November 13th and contributed the following. D contributed cash of 40,000. Z contributed land land land of 60,000 and with that land was subject to a mortgage. Okay which is assumed by the partnership. So the partnership took over the mortgage. Z's basis in the land was 43,000. Basis on the land means what when she bought it it has a basis that means the basis is how much she purchased it at 43,000. The partners agreed to share the profit and losses equally. What is Z's capital on November 13th? So Z contributed the land but what the land came a came a mortgage. Now here's what they're trying to trick you here. The first trick you have to be aware of is this and that's why you have to study for far and regulations separately. If this is if this was a RAG exam this is far exam the basis will transfer. Simply put the basis will transfer but this is not this is not this is not the RAG exam this is the far exam. We're following financial accounting and reporting. What's going to happen is we're going to take the fair market value and since there is a mortgage attached to the land we reduce the mortgage which is 25,000 because if you contributed a land with a mortgage and we took over the mortgage you really your net contribution is 35,000. Therefore the Z's capital is 35,000 when that contribution is made. Be careful and don't use 43 that's regulation. We're not talking about regulation here so this is this is the trick they will they will try to throw at you the difference between how do you treat the contribution between GAP and IFRS. The partnership of Scott and Patricia has 180,000 of net worth so this is the new this is the partners together the partnership would like to add Tim as a partner plus Tim with an exact one-fifth so Tim Tim will have one-fifth of the partnership Tim will have Tim equal to one-fifth of the partnership. How much does Tim need to contribute? So the question is how much Tim needs to contribute this sounds like a GMAT problem if you ask me. So if we have so Scott and Patricia 180,000 plus we're going to add Tim. Tim is going to receive one-fifth of the whole partnership. We don't know what the whole partnership is therefore we're going to consider the whole partnership X because once we add Tim we're going to have a new total that new total is X. That's going to give us the total partnership we said unknown X. Now all we have to do is solve for X to find out what's the new partnership then we'll give Tim one-fifth of that new partnership. We'll ask him to contribute one-fifth of the value. Well let's see if we solve for X so we have 180,000 equal to if we move one-fifth X to the other side that's going to give us four-fifth X. Now to have X on one side we multiply by five-fourth so if we multiply 180,000 multiply by five-fourth to eliminate the four-fifth so one so five divided by four times 180,000 give going to give us X of 225 so when we solve X equal to 225 this is the total partnership this is the total partnership after we add Tim. Now Tim is going to get times one-fifth times one-fifth so if we go back to the calculator here and we'll take 225 times one-fifth is 20% times one-fifth oops sorry times 225 and we'll get one-fifth yeah one-fifth is 45,000 and then that's one of the answers so Tim's will have to contribute 45,000 okay so let's go ahead and reconcile so we started with Tim, Scott and Patricia for 180,000 we said Tim will need to contribute 45,000 equal to 225 just kind of double check our numbers 225 times 1.2 which is one-fifth will give us 45,000 so you could always just double check yourself to make sure it's correct. Homer Bart and Lisa are partners in a partnership Lisa wishes to retire which of the following method of accounting for her retirement could increase the individual could increase the individual's partners account with without changing the total net asset of the partnership here what we have to be aware of there are two methods there's the goodwill method and there's the bonus method and before going into the exam you need to understand both methods so if you don't know what these methods are I strongly suggest you go to farhat lectures.com but I'm gonna try to solve this question here but basically when we when we have the bonus method the under let's start with the goodwill method under the goodwill method what's gonna happen is we will create an intangible when the when the partners withdraw and under the goodwill method we have two methods we have the full and we have the partial but simply put when the partners leave we're gonna have to recognize an intangible and under the goodwill method usually the partners they will agree on how to make the withdrawal under the bonus method someone will get a bonus and as a result you could increase the individual capital account so which have the method the bonus method could increase the individual capital account that's something you need to be aware of something you need to be familiar with so don't go into the exam not knowing the difference between the goodwill method and the bonus method farhat lectures.com is a place to explain this and show you few examples let's take a look at this example we have D and G are partners in a DG partnership during the current here D meant D and G maintain an average capital balance of their partnership of 140 and 80,000 respectively they share the profit and losses equally each receive 5% on their capital balances partnership profit before interest was 5,000 how much the ending balance for the partnership is okay so that's the best way to do this is to kind of have a table we have the G okay the first thing is their beginning balances is 140 and 80,000 and based on the agreement is each one of them get 5% get 5% of their and partnership interest because they can they have they're maintaining a balance at the company at the partnership therefore they are rewarded so we have the profit starting with the profit we have a profit of 5,000 before we distribute the profit we have to give them 5 5% of their capital balance so 140,000 times 5% that should be $7,000 so we're going to increase their balance by 7,000 and 5% times 80,000 is 4,000 this is for D and where is this coming from because of the 5% interest 5% interest well if they have a profit of 5 and we're contributing 11 we're going to be at negative 6 because we only have a profit of 5 now what's going to happen the profit turn into a loss what do we do with any losses we allocate them equally equally equally means negative 3,040 negative 3,004 G and this is what's going to happen now everything is allocated now we are ready to compute the balances so we have 140,000 plus 7147 minus 3144 there asking us about D and this is the answer this is the answer okay so make sure to remember you allocate the interest first then you whatever profit or loss left after the interest is is allocated equally so you have to be very careful again this topic is I have I have this topic explained in the tales with several examples on my website farhatlectures.com which I invite you to visit if you are studying for your CPA exam and serious about passing your exam serious about adding those 10 to 15 points the CPA exam is a lifetime investment you're talking about 30 to 40 years invest in yourself don't shortchange yourself use all your resources to pass study hard good luck and stay safe