Question

When a new partner is admitted into a partnership and the new partner receives a capital credit less than the tangible assets contributed, which of the following explains the difference?

1) I. The new partner's goodwill has been recognized.
2) II. The old partners received a bonus from the new partner.
3) Both I and II
4) None of the above

Answer 1

The difference between the capital credit and tangible assets contributed by the new partner in a partnership often indicates a bonus to the old partners. Goodwill recognition would result in the opposite situation.

Step-by-step explanation:

When a new partner is admitted into a partnership and receives a capital credit less than the tangible assets contributed, it usually indicates that the old partners have received a bonus from the new partner. This bonus is the difference between the value of the tangible assets the new partner contributed and the capital credit they receive. Through this bonus, the new partner essentially 'buys in' to the partnership, compensating the existing partners for the share of the business they are giving up. Recognition of the new partner's goodwill is not relevant here since goodwill would typically result in the new partner's capital account being credited with an amount greater than the tangible assets contributed, not less.