Question

Mo Meek, Lu Ling, and Barb Beck formed the MLB Partnership by making capital contributions of $67,500, $262,500, and $420,000, respectively. They predict annual partnership net income of $450,000 and are considering the following alternative plans of sharing income and loss: (a) equally; (b) in the ratio of their initial capital investments; or (c) salary allowances of $80,000 to Mo, $60,000 to Lu, and $90,000 to Barb; interest allowances of 10% on their initial capital investments; and the balance shared as follows: 20% to Mo, 40% to Lu, and 40% to Barb.

Required

1. Prepare a table with the following column headings.

                                                                                                                                                                         

Income (Loss)                          

Sharing Plan

                                    Calculations Mo Lu Barb Total   

Use the table to show how to distribute net income of $450,000 for the calendar year under each of the alternative plans being considered. (Round answers to the nearest whole dollar.) 2. Prepare a statement of partners’ equity showing the allocation of income to the partners assuming they agree to use plan (c), that income earned is $209,000, and that Mo, Lu, and Barb withdraw $34,000, $48,000, and $64,000, respectively, at year-end. 3. Prepare the December 31 journal entry to close Income Summary assuming they agree to use plan (c) and that net income is $209,000. Also close the withdrawals accounts.

Answer 1

1(a)

	Mo	Lu	Barb	Total
Net income (loss)				450000
Balance allocated equally	150000	150000	150000	450000
Balance of income (loss)				0
Shares to the partners	150000	150000	150000	450000

(b)

	Mo	Lu	Barb	Total
Net income (loss)				450000
Balance allocated in proportion to initial investments	40500	157500	252000	450000
Balance of income (loss)				0
Shares to the partners	40500	157500	252000	450000

Total capital contributed = $67500 + $262500 + $420000 = $750000

Mo: $450000 x 67500/750000 = $40500

Lu: $450000 x 262500/750000 = $157500

Barb: $450000 x 420000/750000 = $252000

(c)

	Mo	Lu	Barb	Total
Net income (loss)				450000
Salary allowances	80000	60000	90000	230000
Balance of income (loss)				220000
Interest allowances	6750	26250	42000	75000
	($67500 x 10%)	($262500 x 10%)	($420000 x 10%)
Balance of income (loss)				145000
Balance allocated (20:40:40)	29000	58000	58000	145000
Balance of income (loss)				0
Shares to the partners	115750	144250	190000	450000

2.

MLB PARTNERSHIP
Statement of Partners' Equity
For Year Ended
	Mo	Lu	Barb	Total
Initial partnership investments	67500	262500	420000	750000
Net income:
Salary allowances	80000	60000	90000	230000
Interest allowances	6750	26250	42000	75000
Balance allocated (20:40:40)	-19200	-38400	-38400	-96000
Total net income	67550	47850	93600	209000
Total	135050	310350	513600	959000
Less: Withdrawals	34000	48000	64000	146000
Ending balances, December 31	101050	262350	449600	813000

3.

General Journal	Debit	Credit
Income Summary	209000
Mo, Capital		67550
Lu, Capital		47850
Barb, Capital		93600
(To close Income Summary)
Mo, Capital	34000
Lu, Capital	48000
Barb, Capital	64000
Mo, Withdrawals		34000
Lu, Withdrawals		48000
Barb, Withdrawals		64000
(To close partners' withdrawals)