Question

In: Accounting

Boswell and Johnson form a partnership on May 1, 2016. Boswell contributes cash of $53,000; Johnson...

Boswell and Johnson form a partnership on May 1, 2016. Boswell contributes cash of $53,000; Johnson conveys title to the following properties to the partnership:

Book
Value
Fair
Value
Land $ 16,500 $ 31,000
Building and equipment 36,500 39,000

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 $900 per month.
  • All remaining profits and losses are split 70:30 to Johnson and Boswell, respectively.
  • Each partner can make annual cash drawings of $6,000 beginning in 2017.


Net income of $12,500 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 $57,000 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 $3,000 compensation allowance per month and an annual cash drawing of $12,000. 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 $35,000.

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 $ 5,943
Boswell 7,862
Walpole 10,076

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 $700 per month and an annual drawing of $5,000. Profits and losses are now assigned as follows:

Johnson 41.0 %
Boswell 13.0
Walpole 36.0
Pope 10.0


For the year of 2018, the partnership earned a profit of $56,000, 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.

Solutions

Expert Solution

FOR THE YEAR 2016

Capital Balance for partners as at December 31, 2016:

Particulars Johnson Boswell Total
Opening balances (note 1) 61500 61500 123000
Income (note 2) 3710 8790 12500
Drawings (note 3) 0 0 0
Ending Balances for Year 2016 65210 70290 135500

Note 1: It is to be noted that the assets brought to the partnership by any partner shall be recorded at the fair value. Therefore the value taken for assets brought in by Johnson shall be recorded at fair Value.

Asset value = 31000+39000= 70000

Cash contribution by Boswell = 53000

Total contribution = $123000

Since the partnership begins with equal capital balances, balance for each partner= 123000/2 = $61500

Note 2: Income for each partner:

Total income for the year 2016= $12500

compensation allowance to Boswell = $7200

Balance profits spit between Johnson and Boswell in the ratio 70:30 = (12500-7200) split in 70:30 = 5300 split in 70: 30

Particulars Johnson Boswell Total
Compensation allowance (May to December- 8 months) 0 7200 7200
Balance profit split in ratio 70:30 3710 1590 5300
Total income 3710 8790 12500

Note 3: Drawings- Capital drawings can be made only from beginning of Year 2017. Therefore no drawings in year 2016.

FOR THE YEAR 2017

Walpole joins the partnership on January 1, 2017 and brings in a capital of $57000 in cash for 40% interest.

Total capital including Walpole's investment = 135500 + 57000 = $192500.

Walpole is given 40% interest for her business reputation and financial expertise.

40% interest accounts to $192500*40% = $77000

As per the question, bonus approach is used to record this investment. This means that the excess of (77000-57000= 20000) shall be considered as bonus from original partners. Since the ratio is 70:30 for Johnson and Boswell this is shared in the ratio of 70:30 = 14000 and 6000 respectively.

Capital Balance for partners as at December 31, 2017:

Particulars Johnson Boswell Walpole Total

Opening balances

(Carried forward from year 2016)

65210 70290 0 135500
Contribution of Walpole ( refer working done before the table) (14000) (6000) 77000 57000
Income (note 4) -5664 9384 31280 35000
Drawings (as per question) -6000 -6000 -12000 -24000
Ending Balances for year 2017 39546 67674 84280 191500

Note 4: Income for the year 2017:

Total income earned = 35000

Compensation allowance = 46800, therefore loss of 46800- 35000= 11800 split in ratio 50:10:40 for Johnson, Boswell and Walpole respectively. Loss = 11800*50%, 11800*10%, 11800 *40% = 5664; 1416; 4720

Particulars Johnson Boswell Walpole Total
Compensation allowance (Jan to Dec= 12 months) 0

10800

(900*12)

36000

(3000*12)

46800
Balance profit split in ratio 50:10:40 -5664 -1416 -4720 -11800
Total income -5664 9384 31280 35000

FOR THE YEAR 2018

On January 1, 2018 Pope is admitted as partner.

Each partner transfers 10% of their capital to Pope for direct receipt of cash from Pope. Since Pope made direct payment to partners, this means that the amount received from Pope will note impact the capital balance of the partners and hence there will be no subsequent goodwill or bonus due to difference in amount received and capital allocated to Pope.

Capital Balance for partners as at December 31, 2018:

Particulars Johnson Boswell Walpole Pope Total

Opening Balances

(Brought forward from 2017)

39546 67674 84280 0 191500

Contribution for Pope

-3955 -6767 -8428 19150 0
Income (Note 5) 328 10904 36288 8480 56000
Drawings ( as per question) -6000 -6000 -12000 -5000 -29000
Ending Balances for year 2018 29919 65811 100140 22630 218500

Note 5: Income for the year 2018:

Total income as given in question = $56000, compensation =$55200, balance profit of $800 to be shared in the ratio 41:13:36:10

Particulars Johnson Boswell Walpole Pope Total
Compensation allowance (Jan to Dec= 12 months) 0

10800

(900*12)

36000

(3000*12)

8400

(700*12)

55200
Balance profit split in ratio 41:13:36:10 328 104 288 80 800
Total Income 328 10904 36288 848 56000

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