Assume that Partners A and B each report a Capital Account of $450,000. Partner

Question

Assume that Partners A and B 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 contribute $900,000 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.

Explanation / Answer

Under bonus method, total capital after admission of Partner C is simply the prior capital plus any change in net asset. In this capital prior capital was $450000 and Partner C added in $900000 in cash. Hence total capital increased to $1350000. Partner C is entitled to 30% of this new business so his beginning capital balance is recorded as $405000 ($1350000 * 30%) Respective Journal entries Under Bonus method as under Account title Debit Credit Cash $9,00,000 Partner C Capital Account $9,00,000 (Capital brought in by Partner C on his admission into partnership) Partner C Capital account $9,45,000 Partner A Capital account $5,67,000 Partner B Capital account $3,78,000 (The excess cash brought in by partner C is distributed among Partner A & B in their old ratio i.e.60:40)

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