Question

Partnership Income Allocation—Various Options
The January 1, 2017, balance sheet of the partnership of Linda Kingston and Jeannette Allen is shown below.

Assets		Liabilities and Capital
Cash	$12,000	Liabilities	$34,000
Other assets	108,000	Capital - Kingston	35,600
		Capital - Allen	50,400
Total assets	$120,000	Total liabilities and capital	$120,000

The partnership reported revenues of $48,000 and expenses of $33,000 for 2017. Neither partner withdrew funds from the partnership during the year. Kingston invested $4,800 in the firm on June 28, 2017.

Required

Compute the December 31, 2017, capital balance for each partner under each of the following assumptions:

(a) The partnership agreement does not specify how income is to be divided.

Balance at December 31, 2017
Kingston	Answer
Allen	Answer

(b) The partnership agreement specifies that Kingston receives 60 percent of income and Allen 40 percent.

Balance at December 31, 2017
Kingston	Answer
Allen	Answer

(c) The partnership agreement specifies that income is divided equally after paying each partner 10 percent interest on her weighted average capital balance.

Balance at December 31, 2017
Kingston	Answer
Allen	Answer

(d) The partnership agreement specifies that Kingston and Allen receive salaries of $7,200 and $4,800, respectively, and that each partner receives 5 percent interest on her capital balance at the beginning of the year. Salary and interest allocations are to be fully implemented. Any remaining income is to be divided equally.

Balance at December 31, 2017
Kingston	Answer
Allen	Answer

Answer 1

Revenue	$48000
Less- Expenses	$33000
Net Income	$15000

a) If nothing is mentioned about the income sharing ratio, then income should be distributed to partners equally

Net income of $15000 will be distributed equally to both of them I.e. $7500 each

Balance at Dec 31, 2017
Kinston    $47900
Allen    $57900

b) $15000 will be distributed 60 percent to Kingston and 40 percent to Allen i.e. 9000 to Kingston and 6000 to Allen

Balance at Dec 31, 2017
Kinston	$49400
Allen	$56400

c) Divided equally after 10% interest on weighted average capital

	Kinston	Allen
Capital @ Beginning 12/12	$35600	$50400
Capital Introduced on June 28, 4800* 6 /12	$2400
Total Weighted Average Capital	$38000	$50400
Interest @ 10%	$3800	$5040

Revenue	$48000
Less- Expenses	$33000
Less- Interest on partner's capital (3800+5040)	$8840
Net Income	$6160

Net Income will distributes $3080 to both of them

Balance at Dec 31, 2017
Kinston	$47280
Allen	$58520

d)

Revenue	$48000
Less- Expenses	$33000
Less- Salary to Kingston	$7200
Salary to Allen	$4800
Less- Interst on beginning capital (86000 * 5%)	$4300
Net Income	$-1300

Net income is negative, partnership is in loss. $650 loss to both of them

Balance at Dec 31, 2017
Kinston	$48730
Allen	$57070

Statement showing capital at the end of both the partner in 4 different cases

	Kingston				Allen
	a	b	c	d	a	b	c	d
Opening Capital	35600	35600	35600	35600	50400	50400	50400	50400
Add - Capital Introduced	4800	4800	4800	4800	0	0	0	0
Interest on capital	0	0	3800	1780	0	0	5040	2520
Salary	0	0	0	7200	0	0	0	4800
Net Income	7500	9000	3080	-650	7500	6000	3080	-650
Capital at the end	47900	49400	47280	48730	57900	56400	58520	57070

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