EX 12-13 Admitting new partner with bonus
Andrew Hall and Brian Li formed a partnership to provide landscaping services. Hall and Li shared profits and losses equally. After all the tangible assets have been adjusted to current market prices, the capital accounts of Andrew Hall and Brian Li have balances of $54,000 and $71,000, respectively. Kristin Lane has expertise with using the computer to prepare landscape designs, cost estimates, and renderings. Hall and Li deem these skills useful; thus, Lane is admitted to the partnership at a 30% interest for a purchase price of $35,000.
a. Determine the recipient and amount of the partner bonus.
b. Provide the journal entry to admit Lane into the partnership.
c. Why would a bonus be paid in this situation?
Answer:
a. Bonus received by Lane: Andrew Hall, Capital...................................................... $ 54,000 Brian Li, Capital............................................................. 71,000 Lane’s contribution....................................................... 35,000 Total partners’ capital after admitting Lane................ $160,000 Lane’s equity interest after admission........................ × 30% Kristin Lane, Capital...................................................... $ 48,000 Lane’s contribution....................................................... 35,000 Bonus paid to Lane....................................................... $ 13,000
b. Cash................................................................................ 35,000 Andrew Hall, Capital...................................................... 6,500 Brian Li, Capital............................................................. 6,500 Kristin Lane, Capital................................................. 48,000
c. Apparently, Hall and Li value the expertise offered by Lane. Lane is able to use the computer to design and render landscape designs. It is likely that this type of skill is very useful for both selling and implementing landscape ideas. Her skills can help the partnership sell ideas to clients by providing computer renderings of the designs. In this way, a client can see the design on the computer before agreeing to work. In addition, the computer-aided landscapes provide materials plans, labor estimates, and other cost estimates for a particular design. Thus, the partners may be better able to control their costs by using Lane’s skills. Overall, they value her skills sufficiently to provide a partner bonus upon her admittance to the partnership.
a. Determine the recipient and amount of the partner bonus.
b. Provide the journal entry to admit Lane into the partnership.
c. Why would a bonus be paid in this situation?
Answer:
a. Bonus received by Lane: Andrew Hall, Capital...................................................... $ 54,000 Brian Li, Capital............................................................. 71,000 Lane’s contribution....................................................... 35,000 Total partners’ capital after admitting Lane................ $160,000 Lane’s equity interest after admission........................ × 30% Kristin Lane, Capital...................................................... $ 48,000 Lane’s contribution....................................................... 35,000 Bonus paid to Lane....................................................... $ 13,000
b. Cash................................................................................ 35,000 Andrew Hall, Capital...................................................... 6,500 Brian Li, Capital............................................................. 6,500 Kristin Lane, Capital................................................. 48,000
c. Apparently, Hall and Li value the expertise offered by Lane. Lane is able to use the computer to design and render landscape designs. It is likely that this type of skill is very useful for both selling and implementing landscape ideas. Her skills can help the partnership sell ideas to clients by providing computer renderings of the designs. In this way, a client can see the design on the computer before agreeing to work. In addition, the computer-aided landscapes provide materials plans, labor estimates, and other cost estimates for a particular design. Thus, the partners may be better able to control their costs by using Lane’s skills. Overall, they value her skills sufficiently to provide a partner bonus upon her admittance to the partnership.
