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Boswell and Johnson form a partnership on May 1, 2016. Boswell contributes cash of $60,000; Johnson...

Boswell and Johnson form a partnership on May 1, 2016. Boswell contributes cash of $60,000; Johnson conveys title to the following properties to the partnership:

Book
Value
Fair
Value
Land $ 20,000 $ 38,000
Building and equipment 40,000 46,000

The partners agree to start their partnership with equal capital balances. No goodwill is to be recognized.

According to the articles of partnership written by the partners, profits and losses are allocated based on the following formula:

Boswell receives a compensation allowance of $800 per month.

All remaining profits and losses are split 60:40 to Johnson and Boswell, respectively.

Each partner can make annual cash drawings of $8,000 beginning in 2017.


Net income of $16,000 is earned by the business during 2016.

Walpole is invited to join the partnership on January 1, 2017. Because of her business reputation and financial expertise, she is given a 40 percent interest for $64,000 cash. The bonus approach is used to record this investment, made directly to the business. The articles of partnership are amended to give Walpole a $3,000 compensation allowance per month and an annual cash drawing of $16,000. Remaining profits are now allocated:

Johnson 45 %
Boswell 15
Walpole 40

All drawings are taken by the partners during 2017. At year-end, the partnership reports an earned net income of $38,000.

On January 1, 2018, Pope (previously a partnership employee) is admitted into the partnership. Each partner transfers 10 percent to Pope, who makes the following payments directly to the partners:

Johnson $ 6,398
Boswell 10,196
Walpole 11,104

Once again, the articles of partnership must be amended to allow for the entrance of the new partner. This change entitles Pope to a compensation allowance of $600 per month and an annual drawing of $7,000. Profits and losses are now assigned as follows:

Johnson 41.0 %
Boswell 13.0
Walpole 36.0
Pope 10.0


For the year of 2018, the partnership earned a profit of $53,000, and each partner withdrew the allowed amount of cash.

Determine the capital balances for the individual partners as of the end of each year: 2016 through 2018.

Ending Balances
Boswell Johnson Walpole Pope
2016
2017
2018

Solutions

Expert Solution

Step 1: Calculate Capital Balances At the End of 2016

Allocation of Income for 2016
Boswell Johnson Total
Salary 6,400 (800*8) 0 6,400
Remaining Income (16,000 - 6,400) 3,840 (9,600*40%) 5,760 (9,600*60%) 9,600
Total $10,240 $5,760 $16,000

____

Statement of Partner's Capital - December 31, 2016
Boswell Johnson Total
Opening Balances (60,000 + 38,000 + 46,000 = $144,000 to be split evenly) 72,000 72,000 144,000
Allocation of Income for 2016 (from above table) 10,240 5,760 16,000
Drawings 0 0 0
Ending Balances for 2016 $82,240 $77,760 $160,000

_______

Step 2: Calculate Capital Balances At the End of 2017

Allocation of Income for 2017
Boswell Johnson Walpole Total
Salary 9,600 (800*12) 0 36,000 (3,000*12) 45,600
Remaining Loss (38,000 - 45,600) -1,140 (-7,600*15%) -3,420 (-7,600*45%) -3,040 (-7,600*40%) -7,600
Total $8,460 -$3,420 $32,960 $38,000

____

Statement of Partner's Capital - December 31, 2017
Boswell Johnson Walpole Total
Opening Balances 82,240 77,760 0 160,000
Walpole's Contribution -10,240 (25,600*40%) -15,360 (25,600*60%) 89,600 64,000
Allocation of Income for 2017 8,460 -3,420 32,960 38,000
Drawings -8,000 -8,000 -16,000 -32,000
Ending Balances for 2017 $72,460 $50,980 $106,560 $230,000

Amount of Bonus = (Total Capital after Walpole's Contribution)*40% - Walpole's Contribution = (160,000 + 64,000)*40% - 64,000 = $25,600

_______

Step 3: Calculate Capital Balances At the End of 2018

Allocation of Income for 2018
Boswell Johnson Walpole Pope Total
Salary 9,600 (800*12) 0 36,000 (3,000*12) 7,200 (600*12) 52,800
Remaining Income (53,000 - 52,800) 26 (200*13%) 82 (200*41%) 72 (200*36%) 20 (200*10%) 200
Total $9,626 $82 $36,072 $7,220 $53,000

____

Statement of Partner's Capital - December 31, 2018
Boswell Johnson Walpole Pope Total
Opening Balances 72,460 50,980 106,560 0 230,000
Admission of Pope -7,246 (72,460*10%) -5,098 (50,980*10%) -10,656 (106,560*10%) 23,000 0
Allocation of Income for 2018 9,626 82 36,072 7,220 53,000
Drawings -8,000 -8,000 -16,000 -7,000 -39,000
Ending Balances for 2018 $66,840 $37,964 $115,976 $23,220 $244,000

As, Pope has made the payment directly to partners, there will be no bonus or goodwill resulting from his admission. Therefore, 10% of capital balance of each partner at the end of 2017 will become the share of Pope.

____

Consolidated Data Table:

Ending Balances
Boswell Johnson Walpole Pope
2016 82,240 77,760 0 0
2017 72,460 50,980 106,560 0
2018 66,840 37,964 115,976 23,220

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