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Advanced Accounting

Question: If a partner is contributing attributes to a partnership such as established clientele or a particular expertise, what methods can be used to record the contribution? Why did you choose this method?

Solution:

The methods which can be used for recording the contribution of a partner in a partnership are:
1. Bonus method
2. Good will method

1. Bonus Method: It is a method used to calculate the contribution of the capital of partner in the partnership. According to this method, the partners contributing intangible assets will provide more capital for the company than what they actually contributed in cash. ("Bonus method").

Partnership journal:

If X and Y are partners in a firm. If X contributes 20000 INR and Y contributes a land of 10000 INR then according to Bonus method

As the partners contribute equal share, Y gets 5000 bonus.

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2. Good will Method: It is also a method used to calculate the contribution of partners. In this method the contributions of tangible assets (physical assets like machinery, building, land etc.,) are calculated and the intangible assets (non-physical assets like trademarks, patents, copyrights etc.,) contribution was calculated as the difference between the partnership value and tangible assets contribution. The difference is contributed to intangible assets of a partner. ("Partnerships: formation and operation").
Partnership journal:

If X and Y are partners in a firm. If X contributes 20000 INR and Y contributes a land of 10000 INR. In addition Y has years of experience in the business, then according to Good will method

X contribution is 20000 INR as he has 50 % partnership the total value of partnership is 20000 + 20000 = 40000 INR
But the total tangible assets is only 20000 + 10000 = 30000 INR
The difference between total value and tangible assets is 40000 INR - 30000 INR = 10000 INR
This difference is the value of intangible assets. Thus, the goodwill attributed to Y is 10000 INR.

The bonus method is used only for identifiable or tangible assets whereas the goodwill method is used to record unidentifiable or intangible assets. The bonus method is used to the attributes in terms of cash where as the goodwill method is used when partner is contributing attributes in an intangible way other than merely cash.

The bonus method and good will methods are also used when adding new partners in a firm. When new partner is joining a firm, the bonus method calculates the capital of new partner and the positive difference is shared as bonus to the existing partners while in goodwill method the new partner may bring the goodwill or the difference is given as good will to the partners who contribute to the intangible assets including new partner. ("Partnerships: Formation and operation"). Goodwill method calculates the difference between assets and liability while bonus method records asset valuation when there is a new partner. There is no asset revaluation in bonus method while goodwill method asses the asset revaluation.

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