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. Required: If the Bonus Method is used to reflect the admission of Partner C, what amount of capital account should Partner C have ?

Answer 1

If the Bonus Method is used to reflect the admission of Partner C, the amount of capital account that Partner C have is $600,000

Step-by-step explanation:

In order to calculate the amount of capital account should Partner C have, we would need to calculate first the paid in capital after admission of C.

Therefore, paid in capital after admission of C= existing partnership capital of A+existing partnership capital of B+investment by C.

paid in capital after admission of C=$450,000+$450,000+$900,000

paid in capital after admission of C=$1,800,000

Therefore, C capital= partnership capital after C admission× c share

C capital= $1,800,000×1/3

C capital=$600,000

Bonus=C capital allocation-investment by C

Bonus=$600,000-$900,000

Bonus=-$300,000

Therefore, the admission of Partner C if the bonus method is used would reflect the following:

Debit Credit

Cash $900,000

Capital A $180,000=$300,000×60%

Capital B $120,000=$300,000×40%

Capital C $600,000