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 prospective 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’ capital balances, which partner would be responsible for the excess liabilities?
5. If I were to purchase a new office building for my existing company, would it be better to hold this office as a personal asset or set up a corporation that owns the office building given my possible investment in the partnership?
6. Would I be better off to loan the partnership a set amount of money as compared to contributing the money as a partner?
7. If during the course of the partnership I decided to sell my partnership interest, would I be better to sell it to the partnership itself or one of the existing partners?
Draft a memo to your client regarding the above questions.