Question: Assume that Partners A and B each report a Capital Account of $650,000. 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 $1,400,000 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. After admission of Partner C, Partners A and B retain their relative proportion of profit allocation after granting Partner C a 30% profit-allocation interest.
Required 1: Use the Bonus Method to record the journal entry on the books of the partnership to reflect the admission of Partner C.
Required 2: Compute the new Capital Accounts and the new profit-sharing ratio for Partners A, B, and C following the admission of Partner C into the partnership. Assume that the partners believe that the payment by Partner C provides evidence of a previously unrecorded intangible asset in the partnership and the partners wish to record the intangible on the post-realignment partnership balance sheet.
Required 3: Use the Goodwill Method to record the journal entry on the books of the partnership to reflect the admission of Partner C.