Question

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 $330,000, $300,000, and $160,000, 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 $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 $9,200 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	1,840	3,000	2,000
Stone	1,560	1,700	1,700
Lawson	2,500	1,500	1,400
Monet	0	1,290	1,620

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

2016	$	95,000
2017		(33,000)
2018		180,000

Each partner withdraws the maximum allowable amount each year.

Determine the allocation of income for each of these three years.

Prepare in appropriate form a statement of partners’ capital for the year ending December 31, 2018.

Answer 1

Allocation of income for year 2016:

Profit and Loss Appropriation A/c

for the year ended 31st December 2016

Particular	Amount	Particular	Amount
To interest on capital Gray 19800 Stone 18000 Lawson 9600	47400	By balance b/d	95000
To salary Gray. 14720 Stone 12480 Lawson 20000	47200
To bonus Gray. 18 Stone 18	36
To net profit transferred to Gray. 121 Stone. 121 Lawson. 122 Total	364 95000	Total	95000

Profit and loss Appropriation A/c

For the year ended 31st December 2017

Particular a	Amount	particular	Amount
To balance b/d	33000	by net loss transferred to Gray. 37315 Stone. 37316 Lawson 37316 Monet. 37316	149263
To interest on capital Gray. 20451 Stone. 18037 Lawson. 10423 Money. 8152	57063
To Salary Gray. 24000 Stone. 13600 Lawson . 12000 Monet. 9600	59200
Totsl	149263	Total	149263

Profit And loss Appropriation A/c

For the year ended 31st December 2018

Particular	Amount	particular	amount
To interest on capital Gray. 18834 Stone. 15893 Lawson . 8487 Monet . 6163	49377	by balance b/d	180000
To salary Gray. 16000 Stone. 13600 Lawson 11200 Monet. 12960	53760
To bonus Gray. 3494 Stone. 3494	6988
To net profit transferred to Gray. 17468 Stone. 17469 Lawson. 17469 Monet. 17468 Total	69875 =180000	Total	180000

Partners Capital A/c

For the year ended 31st December 2018

particular p	Gray	stone	lawson	monet	particular	Gray	stone	Lawson	monet
To drawing	31391	26488	14146	10272	by balance B/d	313909	264878	141457	102716
To balance c/d	338314	288846	164467	129036	By interest on capital	18834	15893	8487	6163
					Bysalary	16000	13600	11200	12960
					By Bonus	3494	3494
					By p/l app. a/c	17468	17468	17469	17469
Total	369705	315334	178613	139308	Total	369705	315334	178613	139308

Calculations of capital for the year ended 2016 and 2017

Particular	gray	stone	lawson	monet	particular	gray	stone	lawson	Monet
To drawing	33000	30000	16000		By balance	330000	300000	160000
Tobalance	340859	300619	173722		By interest on capital	19800	18000	9600
					By cash	9200
					By salary	14720	12480	20000
					By bonus	18	18
					By profit	121	121	122
	373859	330619	189722		Total	373859	330619	189722

Contribution of Monet :-

20% of book value as on 1.1.2017:-

340859+300619+173722=815200*20/120=135867