Assume that Partners A and B each report a Capital Account of $750,000. Partner

Question

Assume that Partners A and B each report a Capital Account of $750,000. Partner A wants to retire and sell her partnership interest to Partner C for $1,000,000. Partner B agrees tot he sale and admission of Partner C into the partnership at an equal ownership percentage.
Record the journal entry on the books of the partnership to reflect the admission of Partner C using both the Bonus Method and Goodwill Method.

Change of partners Assume that Partners A and B each report a Capital Account of $750,000. Partner A wants to retire and sell her partnership interest to Partner C for $1,000,000. Partner B agrees to the sale and admission of Partner C into the partnership at an equal ownership percentage. Record the journal entry on the books of the partnership to reflect the admission of Partner C using both the Bonus Method and the Goodwill Method. Bonus Method: General Journal Description Debit Credit

Explanation / Answer

1. Under bonus method when a new partner brings in new capital which is not in proportion to his share in partnership then the difference is treated as bonus and distributed among remaining partners.

Here total capital for the firm is 1,500,000 (750,000*2) and C was admitted at equal ownership percentage so his capital share would also be 750,000. Further A was supposed to sell his ownership to C at 1,000,000 so the differnece of 250,00 will be treated as bonus. Assuming that C brought his share in Cash and A was paid in cash, the journal entries will be as follows:

i) Cash a/c 1,000,000 Dr.

C's Capital A/c 7,50,000 Cr.

A's Capital A/c 2,50,000 Cr.

ii) A's Capital A/c 1,000,000 Dr.

Cash A/c 1,000,000 Cr.

2. Under goodwill method when a new partner brings in new capital which is not in proportion to his share in partnership then the difference is treated as goodwill and distributed among remaining partners. So here the difference of 250,00 will be treated as Goodwill.

Again assuming that C brought his share in Cash and A was paid in cash, the journal entries will be as follows:

i) Cash a/c 1,000,000 Dr.

Goodwill A/c 250,000 Cr.

C's Capital A/c 750,000 Cr.

ii) Goodwill A/c 250,000 Dr.

A's Capital A/c 250,000 Cr.

iii) A's Capital A/c 1,000,000 Dr.

Cash A/c 1,000,000 Cr.

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