Question

PE 12-4B. Partner bonus Obj. 3 Example Exercise 12-4 Show Me How Hiro has a capital bal- ance of $75,000 after ad- justing assets to fair mar- ket value. Marone con- tributes $20,000 to receive a 40% interest in a new partnership with Hiro. Determine the amount and recipi- ent of the partner bonus.

Answer 1

Solution

Step 1

The new partnership owner's equity is

Hiro contribution of asset $75,000

Marone contribution of cash $20,000

Total equity   $95,000

Step 2

Partner Hiro

Equity Interest = Total Equity after formation x partnership interest

= $ 95,000 x 60%

= $ 57,000

Partner Marone

Equity Interest = Total Equity after formation x partnership interest

= $ 95,000 x 40%

= $ 38,000

Step 3

Partner Marone

Partner Bonus = Partner Equity Interest - Contributed Capital

= $38,000 - $20,000

= $ 18,000

After the partnership formation, the value of partner Marone's capital has increased from $18,000 from $ 20,000 to $ 38,000. The difference of $ 18,000 is a bonus paid to partner Marone by partner Hiro. Partner Hiro's capital account has decreased by the bonus amount of $ 18,000 from $ 75,000 to $ 57,000.

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