Question

Admission of new partner-Bonus Method Assume that Partners A and B each report a Capital Account...

Admission of new partner-Bonus Method
Assume that Partners A and B each report a Capital Account of $150,000. 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 $300,000 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. journal entry on the books of the partnership to reflect the admission of Partner C.

Description Debit Credit
AnswerCashCapital Account, Partner ACapital Account, Partner BCapital Account, Partner C Answer Answer
Capital Account, Partner A Answer Answer
Capital Account, Partner B Answer Answer
AnswerCashCapital Account, Partner ACapital Account, Partner BCapital Account, Partner C Answer

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Answer #1

Solution:

Ratio of profit between A and B = 3:2

Total capital after new capital introduced by C = $150,000 + $150,000 + $300,000 = $600,000

C share in Partnership = 30%

Therefore required share of capital by C = 600000 * 30% = $180,000

Bonus Capital introduced by C = $300,000 - $180,000 = $120,000

Bonus capital will be distributed in A and B in ratio of 3:2

A's share = $120,000*3/5= $72,000

B's share = $120,000*2/5 = $48,000

Journal Entries
Event Particulars Debit Credit
1 Cash Dr $300,000.00
      To Capital Account, Partner A $72,000.00
      To Capital Account, Partner B $48,000.00
      To Capital Account, Partner C $180,000.00
(To record capital contribution by new partner and bonus distribution to old partner)
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