1431414501_PowerPoint_FA2_C12_eng.ppt - Best viewed with Office 2010 Chapter 12 Partnership Revaluatio Introduction Whenever there is a change in the

1431414501_PowerPoint_FA2_C12_eng.ppt - Best viewed with...

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Partnership Revaluatio Partnership Revaluatio Chapter Chapter 12 12 Best viewed with Office 2010
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Introduction Whenever there is a change in the profit and loss sharing ratio or a change in the composition of a partnership all assets (including goodwill) and liabilities of the partnership must be revalued adjusting entries are required to be made immediately in the partners’ capital accounts.
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Need for revaluation When is revaluation needed? Whenever any of the following events happens, all assets and liabilities (i.e., net assets) of the partnership must be revalued immediately: A change in the profit and loss sharing ratio Admission of partners Withdrawal of partners
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Need for revaluation When is revaluation needed? When the fair value of an asset is found to be greater than its net book value, there will be a gain on revaluation. Conversely, if the fair value of an asset is found to be smaller than its net book value, there will be a loss on revaluation. Fair value > Net book value = Gain on revaluation Fair value < Net book value = Loss on revaluation
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Need for revaluation When is revaluation needed? The overall profit or loss on revaluation of all assets and liabilities of the partnership should be shared immediately among the old partners in the old profit and loss sharing ratio . The partners’ capital balances would be increased by the profit on revaluation or decreased by the loss on revaluation.
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Need for revaluation Profit or loss on revaluation shared by old partners If revaluation is not done immediately, any increase or decrease in the value of the net assets of the old partnership will belong to the new partnership. When these net assets are later sold by the new partnership: any increase or decrease in the value of net assets of the old partnership will be realised. the increase or decrease will then be shared among the new partners in the new profit and loss sharing ratio. As a result: some partners in the new partnership will gain from the increase in the value of the net assets of the old partnership without having to pay for it while others will lose without being compensated.
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Need for revaluation Profit or loss on revaluation shared by old partners Example Suppose the value of the premises of a partnership has risen by $2,000,000 by the time a new partner is admitted. If revaluation is not done upon the admission of the new partner, the increase in the value of the premises will not be immediately reflected in the old partners’ capital balances.
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Need for revaluation Profit or loss on revaluation shared by old partners Example When the new partnership is finally dissolved and its premises are sold, that increase in the value of the premises will be realised and then shared among the partners in the new profit and loss sharing ratio.
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  • Spring '07
  • Smith
  • Balance Sheet, Generally Accepted Accounting Principles, partner, Financial Position

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