What is the key difference between buy‑out at book value and buy‑out at market value in a partnership?
Answer
Book value equals the capital balance plus the partner’s share of profits; market value is the current market value of the partner’s capital.
Step-by-step solution
- Define book value: capital balance + share of profits earned up to the point of buy‑out.
- Define market value: the actual market price of the partner’s capital if sold to a third party.
- State the key difference: book value is based on accounting records, while market value reflects real market conditions.
Common mistake: Confusing book value with goodwill or assuming market value equals capital balance
Concept tested: Book value vs market value
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