Question

BC and OP are both private not-for-profit entities. They combine to create LM, a new private not-for-profit entity with an entirely new board of directors. BC holds land with a book value of $300,000 and a fair value of $400,000. OP holds land with a book value of $500,000 and a fair value of $550,000. After LM has been formed, what is the reported value of the land account?

Answer 1

Answer:

$950,000

Explanation:

After LM has been formed, the reported value of the land account will be $950,000, which is made up of the fair values of the land of both partners: $400,000+ $550,000 = $950,000

In partnerships, the value of assets used in calculating the percentage contribution of partners to the business is assessed based on their fair values as at the day of the formation of the partnership as opposed to the carrying book values as at that date.

The logic is that if the partnership business upon inception had chosen to buy those assets they would have been bought at their market values at which they would been available for sale.