Question

Peele and Rigg organized the PR Partnership on January 1, 2019. The following entries were made into their capital accounts during 2019 (PR does not use separate drawing accounts to record partners’ withdrawals):

Peele
	Debits	Credits
1/1		20,000
4/1		5,000
10/1		5,000
Rigg
1/1		40,000
3/1	10,000
9/1	10,000
11/1		10,000

The partnership agreement called for the following in the allocation of partnership profits and losses:

	Salaries of $48,000 and $36,000 will be allocated to Peele and Rigg, respectively
	Interest of 8% on average capital balances will be allocated
	Rigg will receive a bonus of 10% on all partnership billings in excess of $300,000
	Any remaining profits/losses will be allocated 60/40 to Peele and Rigg, respectively.

Required:

1.	USING THE NEXT PAGE, determine the distribution of partnership net income. Assume the following priority of allocation: interest, bonus, salaries, then remaining income. Also, assume partnership income was $85,000 and partnership billings amounted to $400,000.
2.	Prepare the journal entry to record the allocation of the partnership’s net income.

Answer 1

1. Distribution on Partnership Income
	Peele	Rigg	Total	Total Remaining
Income Realized				$ 4,85,000.00		$4,85,000.00
Interest On capital		$       2,000.00	$       2,800.00	4,800.00		$4,80,200.00
Bonus			$                    -	$     18,500.00	18,500.00		$4,61,700.00
Salaries			$     48,000.00	$     36,000.00	84,000.00		$3,77,700.00
Remaining Income		$ 2,26,620.00	$ 1,51,080.00	3,77,700.00		$                   -
Total Division of Income	$ 2,76,620.00	$ 2,08,380.00			$                   -
Interest on Capital calculation
Interest on Capital	=	8%(Opening Capital + Closing Capital)/2
Peele		=	8%(20000+30000)/2
		=	2000
Rigg		=	8%(40000+30000)/2
		=	2800
Bonus of Rigg
	=	10%(485000-300000)
	=	18500
2. Journal Entry
Income A/c		Dr	$ 4,85,000.00
	Peele Capital A/c			$ 2,76,620.00
	Rigg Capital A/c			$ 2,08,380.00
(Being Income allocated among Partners