Question

The Articles of Partnership for partners Moon, Sun, and Stars stipulate 10% interest allowance for each partner based on average capital balances during 2020. The beginning capital balances for Moon, Sun, and Stars on January 1, 2020 are $100,000, $250,000, and $400,000, respectively. On April 1, 2020, Moon invests additional 20,000 in the partnership. On July 1, 2020 Star withdraws 50,000 from the partnership. During 2020, Sun and Stars have drawings of 60,000 and 20,000, respectively.

During 2020, partners Sun and Stars receive salary allocation of 60,000 and 20,000, respectively.

If the partnership’s Net Income for the period after salary allocations are considered is above 130,000, Stars is also going to receive a bonus allowance of 10% of Net Income. The measure of Net Income used to determine the actual amount of the bonus is Net Income after bonus and interest allocations are considered, but before salary allocations are considered. The profit-and-loss sharing ratios for the partnership are: Moon (20%), Sun (50%), and Stars (30%)

1-Assume that the partnership’s net income for 2020 is $250,000. What is the TOTAL partnership RESIDUAL INCOME allocation in 2020? What is the total partnership profit allocation for Moon, Sun, and Stars, respectively? (10 points)

2-Assume that the partnership’s net income for 2020 is $250,000. Prepare the journal entry to close the NI into the Capital balances of the partners. (5p.)

Answer 1

1. CALCULATION OF INTEREST ON PARTNERS CAPITAL

PARTICULARS	MOON $	SUN $	STARS $
OPENING CAPITAL ( 01.01.2020 )	100,000	250,000	400,000
ADD : ADDITIONAL CAPITAL INVESTED (01.04.2020)	20,000
LESS : WITHDRAWINGS ( 01.07.2020 )			50,000
LESS : DRAWINGS		60,000	20,000
CLOSING CAPITAL	120,000	190,000	330,000
AVERAGE CAPITAL	115,000	220,000	365,000
INTEREST ON CAPITAL @10%	11,500	22,000	36,500

CALCULATION OF AVERAGE CAPITAL :

MOON : (100,000 * 3 + 120,000*9) /12 = 115,000

SUN : ( 250,000*6 + 190,000*6) / 12 = 22,000

STARS : ( 400,000*3 + 330,000*6) /12 = 365,000

**TOTAL PARTNERSHIP RESIDUAL INCOME AND PROFIT/LOSS ALLOCATION IN2020

PARTICULARS	MOON $	SUN $	STARS $
SALARY		60,000	20,000
BONUS
( NO BONUS BECAUSE NET INCOME IS BELOW 130,000 )
PROFIT /LOSS ALLOCATION ( 20:50:30 )	50,000	125,000	75,000
TOTAL	50,000	185,000	95,000