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Popeye and Olive are partnerships with capital balances of $50,000 and $40,000, respectively. They agree to...

Popeye and Olive are partnerships with capital balances of $50,000 and $40,000, respectively. They agree to admit Pluto as a partner. After the assets of the partnership are revalued, Pluto will have 15% interest in capital and profits, for an investment of $10,000.

Assume Popeye and Olive receive 50:50 profit/loss before admitting Pluto.

The partnership uses the BONUS method. Answer the following questions:

1) Calculate the interest (in $) received by Pluto and compare with his capital contributed. Who will receive bonus?

2) Calculate the capital of Olive after admitting Pluto

3) Calculate the capital of Popeye after admitting Pluto

4) Journalize the transaction to record the asset contributed and the change in capital of the partners.

5) What are possible reasons that the partner(s) receive(s) the bonus?

Solutions

Expert Solution

1 Calculation of Interest received by Pluto:-
Before admission equities            90,000
Investment of Pluto            10,000
Total Partnership Equity        1,00,000
Interest received by Pluto $ 15,000
(15% of 100,000 )
Comparison with his capital Contributed:-
Interest Received $ 15,000
Investment of Pluto $ 10,000
Bonus $ 5,000
Pluto Will receive bonus of $ 5,000
2 Capital of Olive after admitting pluto
= Existing Capital - Contribution to bonus
= 40,000 - ( 5,000 x 50% )
= 40,000 - 2,500
= $ 37,500
3 Capital of Popeye after admitting pluto
= Existing Capital - Contribution to bonus
= 50,000 - ( 5,000 x 50% )
= 50,000 - 2,500
= $ 47,500
4 Journal Entry:-
Cash 10,000
Popeye , Capital 2,500
Olive, Capital 2500
Pluto, Capital 15,000
5 The reason for receive of bonus by old partners will be when the new partner brings more investment than he receives interest in total capital of firm after his admission.

ekkarill92 answered 2 years ago
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