In: Accounting
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.
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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 |
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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 |
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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 |
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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
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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 |
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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.
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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 |