Question

Brady, Manning and Grossman, sports agents, agree to consolidate their

individual practices as of 1/1/18. The provisions of the partnership

agreement include the following:

1.Each partner’s capital contribution is the net amount of the assets and

liabilities assumed by the partnership, which are as follows:

Brady Manning Grossman

Cash . . . . . . . . . . . . . . . . . . . . . . . . .$10,000 $10,000 $10,000

Accounts receivable . . . . . . . . . . . . . .28,000 12,000 32,000

Furniture and fixtures . . . . . . . . . . . . 8,600 5,000 12,400

46,600 27,000 54,400

Accumulated depreciation . . . . . . . .(4,800) (3,000) ( 9,400)

Accounts payable . . . . . . . . . . . . . . .( 600) (2,800) (1,400)

(5,400) (5,800) (10,800)

Capital Contribution . . . . . . . . . . . . .41,200 21,200 43,600

Each partner guaranteed the collectibility of their receivables.

2.Grossman had leased office space and was bound by the lease

until 7/31/18; the monthly rental is $1,200. The partners agree

to occupy Grossman’s office space until the expiration of the

lease and to pay the rent. On August 1, the partners move to

new quarters with $1,000 monthly rental.

3.The partners receive salaries equal to 20% of the gross fees

billed to their respective clients. The profit and loss ratios are:

Brady, 40%; Manning, 35%; and Grossman, 25%.

On 5/1/18, Marino is admitted to the partnership without any

contribution. Marino is to receive a salary equal to 15% of the

fees his business. The other partners’ profit and loss ratios

remain relatively the same but is adjusted to allow Marino’s ratio

to be 15%.

4.The following information pertains to the partnership’s 2018

activities:

a.Fees are billed as follows:

Brady’s clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 34,500

Manning’s clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43,000

Grossman’s clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25,000

Marino’s clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31,500

Total $ 134,000

b.Total expenses, excluding depreciation and rent expenses,

are $41,250, including the total amount paid for rent.

Depreciation is computed at the rate of 10% on original cost.

c.Cash charges to the partners’ accounts during the year are

as follows:

Brady . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 4,100

Manning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,400

Grossman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,800

Marino . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,500

d.Of Brady’s and Manning’s receivables, $1,150 and $380,

respectively, proved to be uncollectible and were charged

against their capital accounts.

Required:(Any assumptions that you make should be written.)

1.Determine the profit for 2018.

2.Prepare a schedule showing how the profit for 2018 is to be divided.

3.Prepare a statement of the partners’ capital account for the year ended

12/31/18.

I was out sick for the beginning of this class and I am confused on how to even approach the problem. Please help.

Answer 1

1. Profit for the year 2018

	Statement showing Profit & Loss
	As on 31.12.18
		$	$
Income from clients:
	Brady	34,500
	Manning	43,000
	Grossman	25,000
	Marino	31,500
Total Incomes		A	1,34,000
Expenses including Rent			41,250
Depreciation @10%			2,600
Partners' Salary
	Brady	6,900
	Manning	8,600
	Grossman	5,000
	Marino	4,725	25,225
Total expenses		B	69,075
	Profit for 2018 (A-B)		64,925

Note: for calculating depreciation, value of original assets is the total of the furniture and fixtures in the account of all 3 partners. i.e. (8600+5000+12400) = 26000. depreciation at 10% comes to 2600.

2. Profit sharing of partners and new profit sharing ratios.

Marino is admitted with a 15% share in profits.

the original profit sharing ratio was Brady:Manning:Grossman = 40:35:25

Since 15% is given to Marino, 85% of profits to be divided between the remaining 3 inthe ratio of 40:35:25.

Therefore new profit sharing ratios is Brady = (85*40)/100 = 34%

Manning = (85*35)/100 = 29.75

Grossman = (85*25)/100 = 21.25

Marino = 15

Share of partners in the profits
	Ratio	$
Brady	34	22,075
Manning	29.75	19,315
Grossman	21.25	13,797
Marino	15	9,739
Total	100	64925

3. Capital Contribution of Partners'
	Brady	Manning	Grossman	Marino
Balance on 01/01/18	41200	21200	43600	0
Salary to partners	6900	8600	5000	4725
Charged to partners	-4100	-6400	-3800	-7500
Receivables uncollectibles	-1150	-380	0	0
Share in profits	22,075	19,315	13,797	9,739
Capital contribution as on 31.12.18	64925	42335	58597	6964

explanatory notes:

whenever a new partner is admitted, his share in profit is adjusted from the share of existing partners. total profits of a firm cannot be more than 100. in the question, its given that marino's share is s15%, and the shares of other partners to be adjusted in their previous profit sharing ratio, which was 8:7:5 or 40:35:25. we divided 85 in this ratio and derived the new profit sharing ratios.

partners capital accounts to be maintained on the basis of same principles that are used for individual capital accounts.