Question

Kimble, Sykes, and Gerard open an accounting practice on January 1, 2019, in Chicago, Illinois, to be operated as a partnership. Kimble and Sykes will serve as the senior partners because of their years of experience. To establish the business, Kimble, Sykes, and Gerard contribute cash and other properties valued at $298,000, $225,000, and $137,000, respectively. An articles of partnership agreement is drawn up stipulating the following:

• Personal drawings are allowed annually up to an amount equal to 10 percent of the partner's beginning capital balance for the year.
• Profits and losses are allocated according to the following plan:

1. Each partner receives an annual salary allowance of $55 per billable hours worked.
2. Interest is credited to the partners’ capital accounts at the rate of 12 percent of the beginning capital balance for the year.
3. Kimble and Sykes are eligible for an annual bonus of 10 percent of net income after subtracting the bonus, salary allowance, and interest. The agreement also states that there will be no bonus if there is a net loss or if salary and interest result in a negative remainder of net income to be distributed.
4. Any remaining partnership profit or loss is to be divided evenly among all partners.

On January 1, 2020, the partners admit Nichols to the partnership. Nichols contributes cash directly to the business in an amount equal to a 25 percent interest in the book value of the partnership property subsequent to this contribution. The partnership profit and loss sharing agreement is not altered upon Nichols' entrance into the firm; the general provisions continue to be applicable.

The billable hours for the partners during the first three years of operation follow:

	2019	2020	2021
Kimble	3,860	1,800	1,880
Sykes	3,600	1,500	1,620
Gerard	3,460	1,380	1,310
Nichols	0	1,560	1,550

The partnership reports net income (loss) for 2019 through 2021 as follows:

2019	$	336,000
2020		(17,800)
2021		531,000

Each partner withdraws the maximum allowable amount each year.

1. Prepare schedules that allocate each year's net income to the partners.

2. Prepare in appropriate form a statement of partners’ capital for the year ending December 31, 2021.

Answer 1