In: Accounting
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:
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.
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 |