Question

Describe the conceptual differences between the bonus and goodwill methods.

Answer 1

Transaction in the partnership business consists of basically partner's investment, division of partners profit and losses, partner's withdrawal from the business and liquidation of the partnership. Except division of profit and losses and partnership liquidation other mentioned transaction are calculated on the basis of bonus or goddwill method. Treatment under each method is different. Division of profit and losses are based on the agreement between the partners.

1. Partner's investment: Under the bonus method, any difference between the partners investment and book value of the interest is distributed among the partners as bonus. If the investment amount is greater than the book value than bonus is distributed amoung the old partners and if the investment amount is less than the book value than bonus is distributed amoung the new partners. Under the goodwill method, unlike the bonus method here any difference between the investment amount and book value is recorded as goodwill, it is not distributed amoung the partners either old or new.
2. Partner withdrawal: Under the bonus method, assets which are used to pay off the withdrawing partner is adjusted to fair market value. The difference between the re-valued assets and withdrawing partner capital balance is allocated to the remaining partners in the profit sharing ratio. Under the goodwill method, assets are revalued and goodwill is allocated to all partners in the profit sharing ratio.