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Answer 1 & 2 only.

Answer 1 & 2 only.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Answer 1 & 2 only.

Exercise 2 (LO 3, 4, 8) Issues involving goodwill and the liquidation of a partner- ship. Your client has been asked to invest in a partnership which will develop a piece of real estate for commercial use. It is estimated that the development will occur over three years after which time the partnership will be liquidated. After reviewing selected historical and prospec- tive financial information, your client has asked you to provide answers to the following questions: 1. I thought goodwill could only be recorded by a company if it purchased another company. Why does the historical balance sheet show goodwill as an asset even though the partnership has not acquired any other companies? 2. Apparently, a contribution of capital to a partnership can be recorded by either the bonus or goodwill method. For purposes of securing bank financing and reporting an attractive return on investment, which method would be most appropriate? 3. If the partnership secured a bank loan, upon liquidation of the partnership which would be paid back first, the bank loan or my invested capital balance? 4. If the partnership was liquidated and the partnership's liabilities exceeded the partners' capi- tal balances, which partner would be responsible for the excess liabilities?
Transcribed Image Text:Exercise 2 (LO 3, 4, 8) Issues involving goodwill and the liquidation of a partner- ship. Your client has been asked to invest in a partnership which will develop a piece of real estate for commercial use. It is estimated that the development will occur over three years after which time the partnership will be liquidated. After reviewing selected historical and prospec- tive financial information, your client has asked you to provide answers to the following questions: 1. I thought goodwill could only be recorded by a company if it purchased another company. Why does the historical balance sheet show goodwill as an asset even though the partnership has not acquired any other companies? 2. Apparently, a contribution of capital to a partnership can be recorded by either the bonus or goodwill method. For purposes of securing bank financing and reporting an attractive return on investment, which method would be most appropriate? 3. If the partnership secured a bank loan, upon liquidation of the partnership which would be paid back first, the bank loan or my invested capital balance? 4. If the partnership was liquidated and the partnership's liabilities exceeded the partners' capi- tal balances, which partner would be responsible for the excess liabilities?
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