In: Accounting
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 $250,000, $220,000, and $110,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations:
1. Personal drawings are allowed annually up to an amount equal to 10 percent of the beginning capital balance for the year.
2. Profits and losses are allocated according to the following plan:
3. A salary allowance is credited to each partner in an amount equal to $8 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 $9,600 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 | 1,750 | 2,200 | 1,920 |
Stone | 1,480 | 1,400 | 1,660 |
Lawson | 1,700 | 1,420 | 1,350 |
Monet | 0 | 1,230 | 1,620 |
The partnership reports net income for 2016 through 2018 as follows:
2016 | $ | 62,000 |
2017 | (24,400) | |
2018 | 167,000 | |
Each partner withdraws the maximum allowable amount each year.
Question 1: Determine the allocation of income for each of these three years.
Question 2: Prepare in appropriate form a statement of partners’ capital for the year ending December 31, 2018.
a. | |||||
Income Allocation—2016 | Gray | Stone | Lawson | Total | |
Hours | 1750 | 1480 | 1700 | ||
Salary allowance ($8 per billable hour) | $14,000 | $11,840 | $13,600 | $39,440 | |
Interest (working Note A) | $30,768 | $26,400 | $13,200 | $70,368 | |
Bonus (not applicable salary and interest would have negative balance | $0 | $0 | $0 | $0 | |
Remaining loss (split evenly):($62,000 - ($39,440+$70,368) | -$15,936 | -$15,936 | -$15,936 | -$47,808 | |
Profit allocation | $28,832 | $22,304 | $10,864 | $62,000 | |
Working Note A: Interest | Gray | Stone | Lawson | ||
Beginning Capital | $250,000 | $220,000 | $110,000 | ||
Interest 12% ; Gray = ($250,000 x 12% x 4/12)+($250,00+9,600 )x12% x 8/12) | $30,768 | $26,400 | $13,200 | ||
Capital Account Balances—1/1/16 – 12/31/16 | |||||
Gray | Stone | Lawson | Total | ||
Beginning contributions | $250,000 | $220,000 | $110,000 | $580,000 | |
Added Investment | $9,600 | $0 | $0 | $9,600 | |
Profit allocation (from above) | $28,832 | $22,304 | $10,864 | $62,000 | |
Drawing (10% of beginning balances) | -$25,000 | -$22,000 | -$11,000 | -$58,000 | |
Ending balances | $263,432 | $220,304 | $109,864 | $593,600 | |
Income Allocation—2014 | Gray | Stone | Lawson | Monet | Total |
Hours | 2200 | 1400 | 1420 | 1230 | |
Salary allowance ($8 per billable hour) | $17,600 | $11,200 | $11,360 | $9,840 | $50,000 |
Interest (12% x Ending Bal of 2016) | $31,611.84 | $26,436.48 | $13,183.68 | $17,808 | $89,040 |
Bonus (not applicable salary and interest would have negative balance | $0 | $0 | $0 | $0 | $0 |
Remaining loss (split evenly):(-$24,400 - ($50000+$94,976) | -$40,860 | -$40,860 | -$40,860 | -$40,860 | -$163,440 |
Profit allocation | $8,351.84 | -$3,223.52 | -$16,316.32 | -$13,212 | -$24,400 |
Working Note B: Monet Capital | |||||
Monet's Investment = 20% ($593,600 + Monet's Investment) | |||||
.80 Monet's Investment = $118720 | |||||
Monet's Investment | $148,400 | ||||
Capital Account Balances—1/1/17 – 12/31/17 | |||||
Gray | Stone | Lawson | Monet | Total | |
Beginning contributions | $263,432 | $220,304 | $109,864 | $148,400 | $742,000 |
Profit allocation (from above) | $8,351.84 | -$3,223.52 | -$16,316.32 | -$13,212 | -$24,400 |
Drawing (10% of beginning balances) | -$26,343.2 | -$22,030.4 | -$10,986.4 | -$14,840 | -$74,200 |
Ending balances | $245,440.64 | $195,050.08 | $82,561.28 | $120,348 | $643,400 |
Income Allocation—2018 | Gray | Stone | Lawson | Monet | Total |
Hours | 1920 | 1660 | 1350 | 1620 | |
Salary allowance ($8 per billable hour) | $15,360 | $13,280 | $10,800 | $12,960 | $52,400 |
Interest (12% x Ending Bal of 2013) | $29,452.88 | $23,406.01 | $9,907.35 | $14,441.76 | $77,208 |
Bonus (not applicable salary and interest would have negative balance | $3,116 | $3,116 | $0 | $0 | $6,232 |
Remaining loss (split evenly):($167,000 - ($52,400+$77,208+$6232) | $7,790 | $7,790 | $7,790 | $7,790 | $31,160 |
Profit allocation | $55,718.88 | $47,592.01 | $28,497.35 | $35,191.76 | $167,000 |
Working Note C: Bonus = Grey and stone 10% each ; Total bonus = 20% | |||||
Bonus = 20% (Net income – Salary – Interest – Bonus) | |||||
Bonus = .20 ($167,000 – $52,400 – $77,208 – Bonus) | |||||
Bonus | $6,232 | ||||
Bonus per person = $6232/2 | $3,116 | ||||
Capital Account Balances—1/1/18 – 12/31/18 | |||||
Gray | Stone | Lawson | Monet | Total | |
Beginning contributions | $245,440.64 | $195,050.08 | $82,561.28 | $120,348 | $643,400 |
Profit allocation (from above) | $55,718.88 | $47,592.01 | $28,497.35 | $35,191.76 | $167,000 |
Drawing (10% of beginning balances) | -$24,544.06 | -$19,505.01 | -$8,256.13 | -$12,034.8 | -$64,340 |
Ending balances | $276,615.45 | $223,137.08 | $102,802.51 | $143,504.96 | $746,060 |
b) | |||||
GRAY, STONE, AND LAWSON | |||||
Statement of Partners' Capital | |||||
For Year Ending December 31, 2018 | |||||
Gray | Stone | Lawson | Monet | Total | |
Beginning contributions | $245,440.64 | $195,050.08 | $82,561.28 | $120,348 | $643,400 |
Profit allocation (from above) | $55,718.88 | $47,592.01 | $28,497.35 | $35,191.76 | $167,000 |
Drawing (10% of beginning balances) | -$24,544.06 | -$19,505.01 | -$8,256.13 | -$12,034.8 | -$64,340 |
Ending balances | $276,615.45 | $223,137.08 | $102,802.51 | $143,504.96 | $746,060 |