Admission of new partner—Bonus Method Assume that Partners A and B each report a

Question

Admission of new partner—Bonus Method
Assume that Partners A and B each report a Capital Account of $300,000. Partner C wants to join the partnership as an equal one-third partner. Because the partnership has been very profitable, Partners A and B require Partner C to contribute $600,000 in cash to the partnership in return for a one-third interest. Assume that Partners A and B share profits 60% and 40%, respectively, prior to the admission of Partner C. After admission of Partner C, Partners A and B retain their relative proportion of profit allocation after granting Partner C a 30% profit-allocation interest. Use the Bonus Method to record the journal entry on the books of the partnership to reflect the admission of Partner C. journal entry on the books of the partnership to reflect the admission of Partner C.

Fill in the Credit (?) with the correct answer:

Cash Debit : 600,000 Credit: ?

Capital Account, Partner A Debit: 0 Credit: ?

Capital Account, Partner B Debit: 0 Credit: ?

Capital Account, Partner C Debit: 0 Credit: ?

Explanation / Answer

Capital Account Contribution by Partners A and B = $300000 respectively.

CAsh contribution by C to join partnership = $600000

After Cash Contribution the total Capital of the firm = 300000+300000+600000 =$ 1200000

Partner C will assume 1/3 interest in partnership = 1200000/3 = $400000. PArtner C will be awarded Capital Contribution of $400000

The Excess 600000-400000 = $200000 will be allocated between Aand B in the ratio of 60:40

Thus the journal Entrywould be

CAsh A/c $600000 To CApital A/c Partner A $120000 To Capital A/c Partner B $80000 To Capital A/c partner C $400000

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