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 pro 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 Debit Credit Capital Account. Partner A Capital Account Partner 400,000

Explanation / Answer

ans) Following the cash contribution, the total capital accounts (and total partnership net assets) are $1,200,000(i.e., $300,000 + $300,000 + $600,000).The 1/3 capital interest means that Partner C will receive $400,000of capital credit in exchange for the $600,000 contribution.Under the Bonus Method, we assume that PartnerC is paying a $200,000 premium (i.e., $600,000 contribution by C, minus the $400,000 capital credit awardedto C) over book value in order to join the partnership, and the preexisting partners receive that premium as abonus.This $200,000 bonus is allocated according to the partners’ profit-and-loss sharing ratio.This meansPartner A will receive $120,000 (i.e., 60%) of capital credit for the bonus “paid” by Partner C, and Partner Bwill receive the remaining $80,000 (i.e., 40%).The journal entry to record this transaction is as follows:

Cash 600,000

A's capital 120,000

B's capital 80,000

C's capital 400,000

(To record the purchase of a 1/3 partnership interest by Cfor $600,000.)

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