Under what circumstances would we recognize goodwill related to the admission of a new partner?
Let me start by first stating that a partnership is defined by the IRS as "a relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business." There are times however, when the existing partners within a partnership may be forced to admit a new partner - of course with the consent of all the other partners. The reason for them wanting to admit a new partner are varied and may include the fact that they need to acquire more capital to run the business; or they may need more mangerial/skilled persons; or in order to expand or boost up the business; or more importantly to increase the goodwill of the partnership by admitting a well-reputed person ...
This solution first provides an explanation of what a partnership is, as well as what goodwill is. It then gives an explanation for how good is recognized on the admission of a new partner i.e. if and when the partner brings goodwill in the form of cash or kind or assets.