Partnership Bonus
Bonus paid to the partnership .
A new partner may pay a bonus in order to join the partnership. Bonus is the difference between the amount contributed to the partnership and equity received in return.
Assume that Partner A and Partner B have balances $10,000 each on their capital accounts. The partners agree to admit Partner C to the partnership for $16,000. In return, Partner C will receive one-third equity in the partnership. The following table illustrates calculation of the bonus.
| Equity of Partner A | $10,000 |
| Equity of Partner B | $10,000 |
| Contribution of Partner C | $16,000 |
| Total equity after admitting Partner C | $36,000 |
| Equity percentage of Partner C | 33.3% |
| Equity of Partner C | $12,000 |
| Contribution of Partner C | $16,000 |
| Minus equity of Partner C | $12,000 |
| Bonus paid to "A & B Partnership" | $4,000 |
In this case, Partner C paid $4,000 bonus to join the partnership. The amount of any bonus paid to the partnership is distributed among the partners. The following table illustrates the distribution of the bonus.
| Debit | Credit | |
|---|---|---|
| Cash | $16,000 | |
| Partner C, Capital | $12,000 | |
| Partner A, Capital | $2,000 | |
| Partner B, Capital | $2,000 |
Bonus paid to a partner.
Assume now that Partner A and Partner B have balances $10,000 each on their capital accounts. The partners agree to admit Partner C to the partnership for $7,000. In return, Partner C will receive one-third equity in the partnership.
Why would the existing partners allow a new partner to buy an equal share of equity with smaller contribution? It might be because the new partner brings something very valuable to the partnership. It might be special skills.
The following table illustrates calculation of the bonus.
| Equity of Partner A | $10,000 |
| Equity of Partner B | $10,000 |
| Contribution of Partner C | $7,000 |
| Total equity after admitting Partner C | $27,000 |
| Equity percentage of Partner C | 33.3% |
| Equity of Partner C | $9,000 |
| Contribution of Partner C | $7,000 |
| Minus equity of Partner C | $9,000 |
| Bonus paid to Partner C | $2,000 |
In this case, Partner C received $2,000 bonus to join the partnership. The amount of the bonus paid by the partnership is distributed among the partners according to the partnership agreement.
The following table illustrates the distribution of the bonus. Debit to Cash increases the account, while debit to a capital account of a partner decreases the account.
| Debit | Credit | |
|---|---|---|
| Cash | $7,000 | |
| Partner C, Capital | $9,000 | |
| Partner A, Capital | $1,000 | |
| Partner B, Capital | $1,000 |
In an equal partnership bonus paid to a new partner is distributed equally among the partners. In an unequal partnership bonus is distributed according to the partnership agreement.
Assume that Partner A is a 75% partner, and Partner B is a 25% partner. Partner C was admitted to the partnership. He paid $5,000 cash. In return, he received $9,000 equity in the partnership. A $4,000 ($9,000 - $5,000) bonus paid to Partner C would be distributed as follows:
Partner A will pay ($4,000 * 75%) $3,000. His capital account will be debited $3,000.
Partner B will pay ($4,000 * 25%) $1,000. His capital account will be debited $1,000.
| Debit | Credit | |
|---|---|---|
| Cash | $5,000 | |
| Partner C, Capital | $9,000 | |
| Partner A, Capital | $3,000 ($4,000 * 75%) | |
| Partner B, Capital | $1,000 ($4,000 * 25%) |
Read more about this topic: Partnership Accounting
Famous quotes containing the word partnership:
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