Under the Bonus Method, When a New Partner Is Admitted

question 7

Multiple Choice

Under the bonus method, when a new partner is admitted to the partnership, the total capital of the new partnership is equal to:

• A)the book value of the previous partnership plus the fair market value of the consideration paid to the existing partnership by the incoming partner
• B)the book value of the previous partnership plus any necessary asset write ups from book value to market value plus the fair market value of the consideration paid to the existing partnership by the incoming partner
• C)the book value of the previous partnership minus any asset write downs from book to market value plus the fair market value of the consideration paid to the existing partnership by the incoming partner
• D)the fair market value of the new partnership as implied by the value of the incoming partner's consideration in exchange for an ownership percentage in the new partnership

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Definitions:

Correlation Coefficient

A numerical indicator that shows the extent of association between two variables' movements.

Standard Deviation

A statistical measure that quantifies the dispersion or spread of a set of data points or investment returns around their mean.

Risk-Free Rate

The theoretical rate of return of an investment with no risk of financial loss, often represented by the yield on government bonds.

Optimal Risky Portfolio

An investment portfolio that offers the highest expected return for a given level of risk or the lowest risk for a given level of expected return.