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%) Required (show all your calculations):

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.)

3. Assume that the partnership incurs a net loss of $100,000 in 2020. 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)

4. Assume that the partnership incurs a net loss of $100,000 in 2020. Prepare the journal entry to close the net loss into the Capital balances of the partners. (5p.)

Answer 1

Given: 1) Interest on capital 10%

2)Opening Capital of moon,sun,stars: $1,00,000; $2,50,000; $4,00,000

3)On April 1 moon introduces Additional capital : $20,000

4)On July 1 star withdraws: $50,000

5)Drawings Sun andStar=$60,000 and $20,000 respectively

6) Salary sun and Star=$60,000 and $20,000 respectively

7) Star's bonus allowance=10% of net income

8)Profit sharing ratio:2:5:3

SOLUTION 1:

Total Partnership residual income allocation= Interest on capital of moon ,sun star+ Salary of sun and star+Star's Bonus

   =$ 1,70,000

Totat Partnership profit Allocation=$80,000

Moon's Share of Profit= $ 16,000

Sun's Share of Profit=$ 40,000

Star's Share of Profit=$ 24,00

Explanation of Interest on capital

Interest on capital Star=4,00,000*6/12*10/100 (from 1 jan to 1 July + 350,000*6/12*10/100 (from 1 july to 31 dec)

=$20,000+$17,500

Interest on capital sun=250,000*10/100= $25,000

Interest on capital Moon= 1,00,000*3/12* 10/100 (From 1 jan to 1 April) + 1,20,000 *9/12* 10/100 (from 1 April to 31 Dec)

= $ 2,500+ $ 9,000

=$ 11,500

Explanation of Star's bonus =10/110 *( 2,50,000-74,000)

=16,000

SOLUTION 2:   

Date	Account Titles	Debit	Credit
	P& L Appropriation A/c Dr.	$80,000
	To Moon's Capital A/c		$16,000
	To Sun's Capital A/c		$40,000
	To Star's Capital A/c		$24,000

SOLUTION 3: if partnership incurs a loss of $1,00,000

Total Partnership residual income allocation= 0 (as the firm faces losses

  

Totat Partnership Loss Allocation=$100,000

Moon's Share of Profit= $ 20,000

Sun's Share of Profit=$ 50,000

Star's Share of Profit=$ 30,000

SOLUTION4:

Date	Account Titles	Debit	Credit
	Moon's Capital A/c Dr.	20,000
	Sun's Capital A/c Dr.	50,000
	Star's Capital A/c Dr.	30,000
	To P& L Appropration A/c		100,000