Question: The admission of a new partner under the bonus method will result in a bonus to: a. the old partners only. Therefore, the articles of partnership may be written to credit the new partner, rather than the original partners, with either a bonus or goodwill. Computation and recording of bonus (under bonus method) and goodwill (under goodwill method). The allocation of unrecorded gains and losses is based on the normal profit and loss ratio. Conversely, should the partners so choose, dissolution can be a preliminary step in the termination and liquidation of the business. Thus, Goldmans 10 percent interest is computed as $12,000. The investment they make will then be added to the overall assets of the partnership. It is not obligatory that a partnership have a formal Partnership Agreement. When goodwill arises, a goodwill account is created, and a debit entry is made for goodwill. An alternative for recording Morgans acquisition relies on a different perspective of the new partners admission. Hybrid Method of Recording Admission of New Partner: One other approach to Goldmans admission can be devised. To demonstrate the accounting procedures applicable to the transfer of a partnership interest, assume that the following information is available relating to the partnership of Scott, Thompson, and York: As often happens, the relationship of the capital accounts to one another does not correspond with the partners profit and loss ratio. Using the bonus method the excess payment is treated as a bonus to the retiring partner. According to the articles of partnership, King is entitled to 60 percent of all profits and losses with the remaining 40 percent credited each year to Wilson. In this method, existing partners agree to reduce their capital in the partnership firm. Based on negotiations that preceded the acquisition, all parties have agreed that Goldman receives an initial 10 percent interest in partnership property. The right to share in profits and losses as specified in the articles of partnership. Such a presumption is not unusual in an established business, especially if profitable operations have developed over a number of years. Therefore, the following journal entry reflects this transaction: Admission of a new partner is not the only method by which a partnership can undergo a change in composition. Bonus Accounting Method: Under this method, the new partners investment may or may not equal the book value of the capital interest that has been purchased. How Are Partner Loans to Their Partnership Treated? Requires a simple capital reclassification without any accompanying revaluation to acquire 1/3 interest can. Are allocations of the residual amount is recorded as a bonus basically a reward to methods! 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