When the Goodwill Method Is Used and the Book Value

question 10

Multiple Choice

When the goodwill method is used and the book value acquired is less than the value of the assets invested, total implied capital is computed by:

• A) multiplying the new partner's capital interest by the capital balances of existing partners.
• B) dividing the total capital balances of existing partners by their collective capital interest.
• C) dividing the new partner's investment by his (her) capital interest.
• D) dividing the new partner's investment by the existing partners' collective capital interest.

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Definitions:

Market Rate of Interest

The interest rate prevailing in the market for securities of similar risk and maturity.

Amortization

The gradual reduction of a debt over a period of time through regular payments that cover interest and principal.

Carrying Value

The book value of an asset or liability on a company's balance sheet, calculated as the original cost minus any depreciation, amortization, or impairment costs.