Question

Boswell and Johnson form a partnership on May 1, 2016. Boswell contributes cash of $51,000; Johnson conveys title to the following properties to the partnership:

Book Value Fair Value

Land $ 15,500 $ 29,000

Building and equipment 35,500 37,000

The partners agree to start their partnership with equal capital balances. No goodwill is to be recognized.

According to the articles of partnership written by the partners, profits and losses are allocated based on the following formula:

Boswell receives a compensation allowance of $1,200 per month.

All remaining profits and losses are split 70:30 to Johnson and Boswell, respectively.

Each partner can make annual cash drawings of $4,000 beginning in 2017.

Net income of $11,500 is earned by the business during 2016.

Walpole is invited to join the partnership on January 1, 2017. Because of her business reputation and financial expertise, she is given a 40 percent interest for $55,000 cash. The bonus approach is used to record this investment, made directly to the business. The articles of partnership are amended to give Walpole a $2,000 compensation allowance per month and an annual cash drawing of $8,000. Remaining profits are now allocated:

Johnson 50 %

Boswell 10

Walpole 40

All drawings are taken by the partners during 2017. At year-end, the partnership reports an earned net income of $29,000.

On January 1, 2018, Pope (previously a partnership employee) is admitted into the partnership. Each partner transfers 10 percent to Pope, who makes the following payments directly to the partners:

Johnson $ 6,413

Boswell 7,650

Walpole 9,012

Once again, the articles of partnership must be amended to allow for the entrance of the new partner. This change entitles Pope to a compensation allowance of $1,000 per month and an annual drawing of $3,000. Profits and losses are now assigned as follows:

Johnson 40.0 %

Boswell 12.0

Walpole 38.0

Pope 10.0

For the year of 2018, the partnership earned a profit of $51,000, and each partner withdrew the allowed amount of cash.

Determine the capital balances for the individual partners as of the end of each year: 2016 through 2018.

ENDING BALANCES

Boswell Johnson Walpole Pope

2016 68,670 59,830 0 0 *These Are Correct*

2017

2018

Answer 1

Solution:
Determination of Capital Balances for the individual partners
Description	Boswell	Johnson	Walpole	Pope
Capital as on May 1, 2016 ( 51,000 +29,000+37,000) i.e. $117,000 divided equally	58,500	58,500
Compensation allowance (1,200 x 8 months)	9,600
Profit share (11,500 - 9,600) = 1,900 at ratio of 70:30 by Johnson and Boswell	570	1,330
Capital balance at the end of year 2016	68,670	59,830
Capital introduced (68,670+59,830)x40%/60%			85,667
Compensation allowance	14,400		24,000
Profit share (29,000-14,400-24,000) = -9,400 at ratio of 50:10:40 by Johnson, Boswell and Walpole	(940)	(4,700)	(3,760)
Drawings	(4,000)	(4,000)	(8,000)
Capital balance at the end of year 2017	78,130	51,130	97,907
Capital introduced (78,130+51,130+97,907)x10%/90%				25,241
Compensation allowance	14,400		24,000	12,000
Profit share (51,000-14,400-24,000-12,000) = 600 at ratio of 40:12:38:10 by Johnson, Boswell, Walpole and Pope	72	240	228	60
Drawings	(4,000)	(4,000)	(8,000)	(3,000)
Capital balance at the end of year 2018	88,602	47,370	114,135	34,301