Admission of new partner-Bonus Methad Assume that Partners A and 8 each report a

Question

Admission of new partner-Bonus Methad Assume that Partners A and 8 each report a Capital Account of $450.000. 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 contrbute $900,000 in cash to the partnership in return for a one-third interest. Assume that Partners A and B share proas 60% and 40% respect ely, prior to the alrission af Partner C. After admits n of partner C, Partners A and B retain their relative proportion af profit allocation after granting Partner C a 30% profit-alocation interest. Use the Bonus Method to record the journai entry on the books of the partrvership to reflect the admission of Partner C journal entry on the books of the partnership to reflect the admission of Partner C apital Accou Partner A 5 6 8 pause

Explanation / Answer

Net assets of a partnership = Total of partners' capital

Book value of Net assets of the partnership after the contribution of new partner = 450,000 + 450,000 + 900,000 = $1,800,000

New partner's share of that book value = 1,800,000 x 30% (Share %) = $540,000

Bonus to continuing partners = New partner's contribution - New partner's share as computed above
                                               = 900,000 - 540,000 = $360,000

Now, this bonus will be distributed to continuing partners in their profit sharing ratios.

Hence, A will get = 360,000 x 60% = $216,000
and B will get      = 360,000 x 40% = $144,000

Journal entry:-

Description Debit Credit Cash $900,000      Capital Account, Partner A $216,000      Capital Account, Partner B $144,000      Capital Account, Partner C $540,000

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