Question

Assume the existing capital of a partnership is $100,000. Two partners currently own the partnership and split profits 40/60. A new partner is to be admitted and will contribute net assets with a fair value of $50,000. An appraisal of existing partnership assets indicates accounts receivable overstated by $10,000, inventory overstated by $12,000 and land understated by $25,000. What is the total capital of the new partnership if the bonus method is being used?

Answer 1

Answer:

$128,000

Explanation:

Under the bonus method, when a new partner is admitted to the partnership, the total capital of the new partnership:

Book value of new partnership :

= The book value of the previous partnership

- Asset write downs from book to market value

+ Fair market value of the consideration paid to the existing partnership by the incoming partner  

= $100,000 - ($12,000 + $10,000) + $50,000

= $100,000 - $22,000 + $50,000

= $128,000