Summary Bonus and Goodwill Method

Question:

There are two methods that you can use to record Partnership Formation. This two methods
have difference, list the differences between Bonus and Goodwill Method and explain why
you think Bonus Method is the preferred method to use.

Answer:


Bonus Method

o TCC is equal to TAC
o AC is not equal to CC
o TAC is multiplied with Capital Ratio to get the AC
o The total bonus is always equal to zero
o Attributed to Capital

Goodwill Method

o TCC is not equal to TAC
o TAC is greater than TCC
o AC is equal to CC but for basis only
o TAC is computed through trial and error
o Attributed to Intangible Assets

The bonus method is the preferred method because it is much less complicated than the
Goodwill method. Goodwill is difficult to measure because it is attributed to the good name
of the partner, experience, or profitability of the business transferred. It is also difficult to
prove this kind of asset because it is Intangible. On the other hand, the bonus method can
be easily computed because it is attributed to the capital of the partners. This method is
done by multiplying the TAC with the capital ratio to get the AC. Compared to the goodwill
method, TAC must first be calculated through trial and error before multiplying with the
capital ratio. Each CC is divided by the agreed capital ratio, and the highest quotient will
be the TAC. The TAC will then be multiplied to each capital ratio to get the AC.