Question

In: Accounting

Gray, Stone, and Lawson open an accounting practice on January 1, 2016, in San Diego, California,...

Gray, Stone, and Lawson open an accounting practice on January 1, 2016, in San Diego, California, to be operated as a partnership. Gray and Stone will serve as the senior partners because of their years of experience. To establish the business, Gray, Stone, and Lawson contribute cash and other properties valued at $420,000, $390,000, and $195,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations:

Personal drawings are allowed annually up to an amount equal to 10 percent of the beginning capital balance for the year.

Profits and losses are allocated according to the following plan:

A salary allowance is credited to each partner in an amount equal to $7 per billable hour worked by that individual during the year.

Interest is credited to the partners’ capital accounts at the rate of 12 percent of the average monthly balance for the year (computed without regard for current income or drawings).

An annual bonus is to be credited to Gray and Stone. Each bonus is to be 10 percent of net income after subtracting the bonus, the salary allowance, and the interest. Also included in the agreement is the provision 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.

Any remaining partnership profit or loss is to be divided evenly among all partners.

Because of financial shortfalls encountered in getting the business started, Gray invests an additional $9,400 on May 1, 2016. On January 1, 2017, the partners allow Monet to buy into the partnership. Monet contributes cash directly to the business in an amount equal to a 20 percent interest in the book value of the partnership property subsequent to this contribution. The partnership agreement as to splitting profits and losses is not altered upon Monet’s 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:

2016 2017 2018
Gray 1,870 3,900 2,110
Stone 1,650 2,400 1,830
Lawson 3,400 1,590 1,520
Monet 0 1,400 1,790

The partnership reports net income for 2016 through 2018 as follows:

2016 $ 97,000
2017 (41,400)
2018 224,000

Each partner withdraws the maximum allowable amount each year.

A. Determine the allocation of income for 2016, 2017, 2018 (1 chart for each)

gray stone lawson totals
salary allowace
interest
bonus
remainder to allocate
income allocation

B. prepare in appropriate form a statment of partners capital for the year ending dec. 31 2018

gray stone lawson monet total
beg. balances
profit allocation
drawings
ending balances

Solutions

Expert Solution

A. Determine the allocation of income for
2016 2017 2018
gray stone lawson totals gray stone lawson Monet totals gray stone lawson Monet totals
salary allowace $         13,090 $        11,550 $        23,800 $       48,440 $          27,300 $ 16,800 $      11,130 $    9,800 $       65,030 $ 14,770 $12,810 $10,640 $12,530 $        50,750
interest $           4,341 $          3,900 $          1,950 $       10,191 $            4,057 $    3,689 $        1,879 $    2,405 $       12,030 $   3,396 $ 3,060 $ 1,414 $ 1,893 $          9,763
bonus $           3,488 $          3,488 $                -   $         6,976 $                  -   $         -   $             -   $         -   $               -   $ 14,862 $14,862 $        -   $        -   $        29,724
remainder to allocate $         10,464 $        10,465 $        10,464 $       31,393 $         (29,615) $(29,615) $    (29,615) $(29,615) $    (118,460) $ 33,441 $33,440 $33,441 $33,441 $      133,763
income allocation $         31,383 $        29,403 $        36,214 $       97,000 $            1,742 $ (9,126) $    (16,606) $(17,410) $      (41,400) $ 66,506 $64,092 $45,576 $47,825 $      224,000
Amount to be transferred to Partner Cap. $         18,293 $        17,853 $        12,414 $       48,560 $         (25,558) $(25,926) $    (27,736) $(27,210) $    (106,430) $ 51,736 $51,282 $34,936 $35,295 $      173,250

B.

Statment of partners capital for the year ending dec. 31 2018
gray stone lawson Monet total
beg. balances $ 339,565.70 $ 306,041.70 $ 141,386.60 $189,343.50 $   976,337.50
profit allocation $    51,736.00 $   51,282.00 $   34,936.00 $ 35,295.00 $   173,249.00
drawings $    33,956.57 $   30,604.17 $   14,138.66 $ 18,934.35 $     97,633.75
ending balances $ 357,345.13 $ 326,719.53 $ 162,183.94 $205,704.15 $1,051,952.75

Working Notes

1 statment of partners capital for the year ending dec. 31 2016

gray stone lawson Monet total
beg. balances $ 420,000.00 $ 390,000.00 $ 195,000.00 $               -   $1,005,000.00
Addition   $      9,400.00 $                -   $                -   $               -   $       9,400.00
profit allocation $    18,293.00 $   17,853.00 $   12,414.00 $               -   $     48,560.00
drawings $    42,000.00 $   39,000.00 $   19,500.00 $               -   $   100,500.00
ending balances $ 405,693.00 $ 368,853.00 $ 187,914.00 $               -   $   962,460.00

2. statment of partners capital for the year ending dec. 31 2017

gray stone lawson Monet total
beg. balances $ 405,693.00 $ 368,853.00 $ 187,914.00 $240,615.00 $1,203,075.00
profit allocation $ (25,558.00) $ (25,926.00) $ (27,736.00) $ (27,210.00) $ (106,430.00)
drawings $    40,569.30 $   36,885.30 $   18,791.40 $ 24,061.50 $   120,307.50
ending balances $ 339,565.70 $ 306,041.70 $ 141,386.60 $189,343.50 $   976,337.50

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