Question

The partnership agreement of Alice, Baron & Crane was formed on January 2, 2017. The original cash investments were as follows:

Alice               $    96,000

Baron                 144,000

Crane                 216,000

According to the partnership contract, the partners were to be remunerated as follows:

1. Salaries of $14,400 for Alice, $12,000 for Baron, and $13,600 for Crane.
2. Interest at 12% on the average capital account balances during the year.
3. Remainder divided 40% to Alice, 30% to Baron and 30% to Crane.

Income before partner withdrawals during the year ended December 31, 2017 was $92,080. During 2017 Alice invested additional capital of $24,000 in the partnership on July 1; Crane withdrew capital of $36,000 from the partnership on October 1. Each of the partners had monthly withdrawals of $1,250 against their shares of income for the year.

REQUIRED: Prepare a schedule showing the allocation of the partnership income to each partner.

Answer 1

Notes:

Note 3:

Note 4

Please note, question only asks for income statement, therefore as per the format of allocation of income and losses (also known as appropriation of profits) has been prepared. Note 4 is just for an additional understanding to show how profits and losses of partners are impacted as per their drawings in each month during the year.

Also, it has been assumed that capital is prepared in a fixed account manner, therefore, monthly drawings do not impact our capital and therefore it is only impacted with additions and withdrawals of capital by partners. Meaning thereby, Interest on capital @ 12% is calculated on average capital during the year. Because had it been simply on capital, our interest on capital would have varied.