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 $225,000. 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 $450,000 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. | Description Credit Cash 450,000 Capital Account, Partner A 0 X Capital Account, Partner B 0 X Capital Account, Partner C $ ? 0 X

Explanation / Answer

Following the cash contribution, the total capital accounts (and total partnership net assets) are $900,000(i.e., $225,000 + $225,000 + $450,000). The 1/3 capital interest means that Partner C will receive $300,000of capital credit in exchange for the $450,000 contribution. Under the Bonus Method, we assume that PartnerC is paying a $300,000 premium (i.e., $450,000 contribution by C, minus the $300,000 capital credit awardedto C) over book value in order to join the partnership, and the preexisting partners receive that premium as abonus. This $150,000 bonus is allocated according to the partners’ profit-and-loss sharing ratio. This meansPartner A will receive $90,000 (i.e., 60%) of capital credit for the bonus “paid” by Partner C, and Partner Bwill receive the remaining $60,000 (i.e., 40%).

The journal entry to record this transaction is as follows:

Cash 450,000

A, Capital 90,000

B, Capital 60,000

C, Capital 300,000

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