Question

Gray, Stone, and Lawson open an accounting practice on January 1, 2013, 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 $210,000, $180,000, and $90,000, 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:

  

	(1)	A salary allowance is credited to each partner in an amount equal to $8 per billable hour worked by that individual during the year.
	(2)	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).
	(3)	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 the bonus cannot be a negative amount.
	(4)	Any remaining partnership profit or loss is to be divided evenly among all partners.

  

Because of monetary problems encountered in getting the business started, Gray invests an additional $9,100 on May 1, 2013. On January 1, 2014, the partners allow Monet to buy into the partnership. Monet contributes cash directly to the business in an amount equal to a 25 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: 2013 2014 2015   Gray 1,710      1,800      1,880        Stone 1,440      1,500      1,620        Lawson 1,300      1,380      1,310        Monet 0      1,190      1,580      The partnership reports net income for 2013 through 2015 as follows:      2013 $ 65,000       2014 (20,400)      2015 152,800     Each partner withdraws the maximum allowable amount each year. a. Determine the allocation of income for each of these three years. Income Allocation—2013 Gray Stone Lawson Totals Salary allowance $0 Interest 0 Bonus 0 Remaining profit/loss 0 Income allocation $0 $0 $0 $0 Income Allocation—2014 Gray Stone Lawson Monet Totals Salary allowance $0 Interest 0 Bonus 0 Remaining profit/loss 0 Income allocation $0 $0 $0 $0 $0 Income Allocation—2015 Gray Stone Lawson Monet Totals Salary allowance $0 Interest 0 Bonus 0 Remaining profit/loss 0 Income allocation $0 $0 $0 $0 $0 b. Prepare in appropriate form a statement of partners' capital for the year ending December 31, 2015. (Amounts to be deducted should be indicated with minus sign. Round your answers to nearest dollar amounts.) Capital Account Balances 1/1/15 – 12/31/15 GRAY, STONE, LAWSON, and MONET Statement of Partners' Capital For the Year Ending December 31, 2015 Gray Stone Lawson Monet Totals Beginning balances $0 Profit allocation 0 Drawings 0 Income allocation $0 $0 $0 $0 $0

Answer 1

Ans

First given below schedule of income allocation 2013

Income Allocation—2013
	Gray	Stone	Lawson	Totals
salary allowance ($ 8 per billable allowance)	13680	11520	10400	35600
interest ( refer note 1)	25928	21600	10800	58328
bonus (refer note 2)	0	0	0	0
loss distributed evenly	-9643	-9643	-9642	-28928
Profit allocation	29965	23477	11558	65000

Working Note 1 calculation

interest calculation
for the year 2013
date	particulars	Gray	Stone	Lawson
1/1/2013	opening capital	210000	180000	90000
	interest @ 12% for 4 months	8400
1 may ,2013	capital invested	9100
	total capital	219100
	interest @ 12% for 8 months	17528
	interest @12% for 12 months		21600	10800
	Total interest	25928	21600	10800

Working note 2 calculation

calculation of bonus for the year 2013
particulars	amount($)
net income	65000
less
salary allowance	-35600
interest	-58328
profit/(loss) if loss no bonus	-28928

b)

we will make the statement capital account for the year 2013

GRAY, STONE, LAWSON
Statement of Partners' Capital
For the Year Ending December 31, 2013
particulars	Gray	Stone	Lawson	Totals
Beginning contributions	210000	180000	90000	480000
added investment	9100			9100
Profit allocation(refer income statement)	29965	23477	11558	65000
Drawings ( 10% of the beginning balances)	-21000	-18000	-9000	-48000
Closing balance	228065	185477	92558	506100

Given in the problem Monet contributes cash directly to the business in an amount equal to a 25 percent interest in the book value of the partnership property subsequent to this contribution

This is calculated below Monet investment

Monet's Investment = 25% ($506,100 + Monet's Investment)

Ml = $126,525 + .25 Ml

.75 Ml = $126,525

Ml = $168,700

First given below schedule of income allocation 2014

Income Allocation—2014
	Gray	Stone	Lawson	Monet	Totals
salary allowance ($ 8 per billable allowance)	14400	12000	11040	9520	46960
interest ( refer note 3)	27368	22257	11107	20244	80976
bonus (refer note 4)	0	0	0		0
loss distributed evenly	-37084	-37084	-37084	-37084	-148336
Profit /loss allocation	4684	-2827	-14937	-7320	-20400

Working note 3

interest calculation
for the year 2014
date	particulars	Gray	Stone	Lawson	Monet
1/1/2014	opening capital	228065	185477	92558	168700
	interest @12% for 12 months	27368	22257	11107	20244

Working note 4

calculation of bonus for the year 2014
particulars	amount($)
net income	-20400
less
salary allowance	-46960
interest	-80976
profit/(loss) if loss no bonus	-148336

we will make the statement capital account for the year 2014

GRAY, STONE, LAWSON and Monet
Statement of Partners' Capital
For the Year Ending December 31, 2014
particulars	Gray	Stone	Lawson	Monet	Totals
Beginning contributions	228065	185477	92558	168700	674800
Profit /loss allocation(refer income statement)	4684	-2827	-14937	-7320	-20400
Drawings ( 10% of the beginning balances)	-22807	-18548	-9256	-16870	-67480
Closing balance	209942	164103	68365	144510	586920

C )

First given below schedule of income allocation 2015

Income Allocation—2015
	Gray	Stone	Lawson	Monet	Totals
salary allowance ($ 8 per billable allowance)	15040	12960	10480	12640	51120
interest ( refer note 7)	25193	19692	8204	17341	70430
bonus (refer note 8)	2604	2604	0		5208
profit distributed evenly	6510	6510	6511	6511	26042
Profit allocation	49347	41766	25195	36492	152800

Working note for interest

interest calculation
for the year 2015
date	particulars	Gray	Stone	Lawson	Monet
1/1/2015	opening capital	209942	164103	68365	144510
	interest @12% for 12 months	25193	19692	8204	17341

Working note for bonus calculation

calculation of bonus for the year 2015
particulars	amount($)
net income	152800
less
salary allowance	-51120
interest	-70430
profit/(loss) if loss no bonus	31250
less
Bonus (calculation given below)	5208
profit after bonus	26042

The bonus to Gray and Stone is entitled to 10% of net income as defined, the total bonus is 20% and can be computed as follows:

Bonus = 20% (Net income – Salary – Interest – Bonus)

B = .2 ($152,800 – $51,120 – $70,430 – B)

B = .2 ($31,250 – B)

B = $6,250 – .2B

     1.2 B = $6,250

B = $5,208 (or $2,604 per person)

D)

we will make the statement capital account for the year 2015

GRAY, STONE, LAWSON and monet
Statement of Partners' Capital
For the Year Ending December 31, 2015
particulars	Gray	Stone	Lawson	Monet	Totals
Beginning contributions	209942	164103	68365	144510	586920
Profit /loss allocation(refer income statement)	49347	41766	25195	36492	152800
Drawings ( 10% of the beginning balances)	-20994	-16410	-6837	-14451	-58692
Closing balance	238295	189459	86723	166551	681028