Smith, and Young are partners with present capital balances of $60,000, Wright,

Question

Smith, and Young are partners with present capital balances of $60,000, Wright, $35,000, and S30,000, respectively. The partners share profits and losses according to the following percentages: 40% for Wright, 30% for Smith, and 30% for Young. Locke is to join the partnership upon contributing $40,000 to the partnership in exchange for a 20% interest in capital and profits and losses. The original partners will share the balance of profits and losses in proportion to their original percentages. Required: assuming use of the bonus method.

Explanation / Answer

Capital balance as per Bonus Method :-

Bonus

[$40000 - $33000]

(7000)

Note:- Locke shares in partnership =  Total partnership capital * 20%

   = [60000 + 35000 + 30000 + 40000] * 20%

= 165000 * 20%

=$33000

   Locke brings extra of $7000 as bonus which will be distributed to original partners according to their profit and loss sharing proportions

Wright Smith Young Locke Capital Balance $60000 $35000 $30000 - New partner'sInvestment :

Bonus

[$40000 - $33000]

7000 * 40% = 2800 7000*30% = 2100 7000*30% = 2100

(7000)

Capital Balance [40000] - - - 40000 Total 62800 37100 32100 33000

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