[nalratoss]

For example, there are 3 ways to account the addition of new partner to a partnership.

Bonus credited to original partners

Goodwill credited to original partners

Revaluation of current assets

bonus or goodwill credited to new partner

Here’s a question I got totally tricked:

Max Blau and Harry Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May 1, their respective capital accounts were as follows:
Blau
$60,000
Rubi
50,000
On that date, Joe Lind was admitted as a partner with a one-third interest in capital and profits for an investment of $40,000. The new partnership began with total capital of $150,000. Immediately after Lind’s admission, Blau’s capital should be
$50,000
Submit $60,000
Graded Submit $46,000
Correct Submit $54,000
This answer is correct.
Following the entrance of Lind, the partnership began with total capital of $150,000, the sum of the capital balances of Blau and Rubi and Lind’s investment. Thus, no goodwill was recognized. Lind received a one-third interest, and his capital balance must be credited for $50,000 ($150,000 × 33 1/3%). But Lind contributed only $40,000, so the $10,000 bonus ($50,000 – $40,000) must be allocated to the existing partners in the ratio of 6:4. The result will be debits to the capital accounts of Blau and Rubi of $6,000 ($10,000 × 60%) and $4,000 ($10,000 × 40%), respectively. Consequently, immediately after Lind’s admission, Blau’s capital is $54,000 ($60,000 – $6,000).

I got totally tricked by the “one third”. I used 40,000 to divide 1/3 to get 120,000. Then I thought there is a goodwill of 30,000 so I allocated goodwill to Blau and Rubi. Instead, the answer reveals it uses the bonus method.

How do I distinguish the above methods? Really trial and error of all the methods?

[Skynet]

You always treat her with respect. You buy her flowers and get the door for her. Never ever forget her Birthday or Anniversary either : )

[jc1103]

I thought they eliminated this topic for the 2017 exam? It's not covered in Becker at all and I don't see it on the blueprints the AICPA released.

[x260bm]

He was given 1/3rd of 150,000 which is 50,000. Since he contributed 40,000 the other 10,000 has to come from the other partners. Your way is wrong because he would end up with less than a 1/3rd interest and you don't subtract from capital accounts to account for goodwill.

[Author]

Replies