28. Which of the following is true about the bonus method of accounting for admi

Question

28. Which of the following is true about the bonus method of accounting for admission of a partner? The total capital of the new partnership is equal to the book value of the old partnership, less any write-down in the value of the old partnership's assets, plus the fair value of the assets transferred by the new partner to the partnership. a. b. Consistent with Generally Accepted Accounting Principles (GAAP), only increases (but not decreases) in the value of the existing partnership's assets are recognized when a new partner is admitted. Both of these statements are correct None of these statements is correct. c. d.

Explanation / Answer

Under bonus method of accounting for admission of partner none of the statements mentioned above is correct i.e. option d) because of following reasons:

The total capital of new partnership is equal to prior capital plus minus any change in net assets. Not only written down in the value of old partnership assets is recorded but the entire change in net assets is recorded.

Consistent with GAAP both increases and decreases are recognised in the existing partnership's net assets when new partner is admitted.

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