In this method, existing partners agree to reduce their capital in the partnership firm. The difference between the investment of the new partner and the book value of the capital is called the Bonus and is distributed among the existing partners.
Journal Entry
| Description | Debit | Credit |
| Cash | xxx | |
| Adam’s capital | xxx | |
| Boon’s capital | xxx | |
| Donald’s capital | xxx |
Example Question
Donald invest $600,000 gto acquire the share in the partnership firm. The book value of his invcvestment is $700,000. Existing partners have decided to redcue their capital after admission of the Donald in the firm.
Answer
| Description | Debit | Credit |
| Cash | 600,000 | |
| Adam’s capital | 50,000 | |
| Boon’s capital | 50,000 | |
| Donald’s capital | 700,000 |
Example 2
Adam and Bevan are running a management consultancy partnership firm. The partnership deed allows them to share the profit and loss in 1:1 ratio. The balance sheet of Adam and Bevan is as follows:
Balance Sheet
| CashOther assets | 30,000800,000 | Accounts payableAdam’s capitalBevan’s capital | 30,000400,000400,000 |
| 830,000 | 830,000 |
Both the current partners have decided to admit a new famous business tycoon Charlie into the partnership by giving him 1/3 interest in the firm. Charlie has strong background in sales and marketing side and is regarded as a running marketing symbol. By the induction of Charlie, around 30 new customers will be availing consultancy services from the partnership firm. There is also a great opportunity of new business in the long run from this addition.
Charlie invests $ 400,000 cash to acquire 1/3 interest.
Requirement
Record the general entries to record the admission of the new partner Charlie.
Also prepare balance sheet post admission of Charlie.
Solution
Charlie’s capital
Interest of C = 1/3
Total capital of Adam & Bevan = 400,000 + 400,000 = 800,000
Investment of C = 400,000
Total capital of new partnership = 1,200,000
Value of Charlie’s capital = 1,200,000 x 1/3 = 400,000
Bonus Calculation
Charlie’s investment = 400,000
Charlie’s capital value = 400,000
Bonus = zero
General journal entries
| Description | Debit | Credit |
| CashCharlie’s capital | 400,000 | 400,000 |
Balance Sheet
| CashOther assets | 430,000800,000 | Accounts payableAdam’s capitalBevan’s capitalCharlie’s capital | 30,000400,000400,000400,000 |
| 1,230,000 | 1,230,000 |