Question

When two or more individuals come together to form a partnership, the assets that they bring with them into the partnership may be disproportionate. In this event, the assignment of capital may be based on the bonus method or the goodwill method. Please compare and contrast these methodologies in the formation of a partnership. Feel free to use examples.

Reminder: Your initial posting should be 250-500 words

Answer 1

Contrast between bonus method and goodwill method :-

Bonus method :-

The bonus method is used to grant a new partner additional capital in a partnership when the person is adding goodwill or some other intangible asset to the partnership. Any positive difference between the capital amount granted and the tangible asset contribution of the new partner is recorded in the original partners' capital accounts based on the partners' normal method of allocating profits and losses. If the capital amount granted is less than the tangible asset contribution, the difference is allocated to the incoming partner. The bonus method is especially common when a new partner has an unusually high level of expertise that is expected to help a partnership.

Goodwill method :-

Goodwill arises due to good name and
reputation of the business and partners. It
is calculated by subtracting the book value
and the value of investment made by the
new partner. This method is used when the
existing partners do not agree to reduce
their capital.

Primarily, Goodwill is mostly useful at the time of introduction of partner with introduction of additional capital and introdiction of new assets .

And also deciding the ratio of profits sharing and loss sharing. Also helpful in the calculating the amount of compensation to existing partners for forgiving their share in the partnership.

These are all the information regarding contrast between bonus method and goodwill method.

I hope, all the above mentioned information and explanations are useful and helpful to you.

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