Detailed Answer
(c) Under the bonus method, adjustments are made
only among partner’s capital accounts (no goodwill is recorded
on the partnership books). Since Mill’s partnership interest exceeded
the amount of Mill’s capital balance, the excess interest
would reduce the capital balances of Yale and Lear. Only under
the goodwill method can the excess interest be recorded as
goodwill. Under no circumstances should the excess partnership
interest be recorded as an expense.