Question

When the partnership was admitting Tom, the existing partners John and Jane did not
understand the accounting method used to admit a new partner. Write a brief memo
explaining to John and Jane the bonus method for accounting for the admission of Tom
to the partnership.

To: John and Jane
From: CPA Candidate
Re: Admission of new partner

Answer 1

To: John and Jane
From: CPA Candidate
Re: Admission of new partner

Bonus method of accounting when admiting new partner :

Bonus method is useful to grant a new partner additional capital in a partnership when goodwill is adding because of the person joining. Generally where the new partner is having high level of demand in that particular area prefers bonus method.

If difference between the capital amount granted and contribution of tangible assetsof the new partner is positive number then the difference will be recorded in the original partners' capital accounts based on the partners' normal method of allocating profits and losses.

If difference between the capital amount granted is less than the tangible asset contribution, the difference is allocated to the incoming partner.