INVESTING IN AN EXISTING PARTNERSHIP  (For examples see: http://www.cord.edu/faculty/bfoss/partexample.html)

A The old partnership is legally dissolved.

B Noncash investments are valued using the same valuation techniques as used for initial investments.

C Investment of the new partner is recorded under the provisions of the new partnership agreement.

D Basis for revaluation of the partnership:

1 If the new partner's capital interest in the total of the old capital plus new investment is less than the new partner's investment, there is an implication that the old partnership had unrecorded asset value.
  a Revaluation is determined by dividing the new partner's capital investment by his or her interest in the new partnership.

b The unrecorded asset value may be recognized by the goodwill or bonus approach.

(1) Goodwill approach: (a) The difference between the implied value and the total of the old capital plus the new investment is goodwill.

(b) The goodwill is divided among the old partners in their old profit and loss sharing ratios before the admittance of the new partners.
 

 (2) Bonus approach: The assets are not revalued, but the difference between the new partner's investment and his/her capital credit is divided among the old partners in their old profit sharing ratios.
  2 If the new partner's capital interest in the total of the old capital plus new investment is greater than the new partner's investment, there is an implication that the new partner is bringing unidentifiable assets into the partnership
  a The total capital of the new partnership is determined by dividing the old partners' capital by the old partners' interest retained in the new partnership.

b The unidentifiable asset value from the incoming partner can be recognized by either the goodwill or the bonus approach.

(1) Goodwill approach: Assets are revalued to their fair values and goodwill to the new partner is recorded.

(2) Bonus approach:

(a) Assets are not revalued

(b) Capital balances of the old partners are reduced for the bonus to the new partner and the new partner's capital account is recorded according to the partnership agreement.