Question

Problem 12-3A Allocating partnership income P2 

Kara Ries, Tammy Bax, and Joe Thomas invested $80,000, $112,000, and $128,000, respectively, in a partnership. During its first calendar year, the firm earned $249,000. 

Required 

Prepare the entry to close the firm's Income Summary account as of its December 31 year-end and to allocate the $249,000 net income to the partners under each of the following separate assumptions:

 1. The partners have no agreement on the method of sharing income and loss.

 2. The partners agreed to share income and loss in the ratio of their beginning capital investments.

 3. The partners agreed to share income and loss by providing annual salary allowances of $66,000 to Ries, $56,000 to Bax, and $80,000 to Thomas; granting 10% interest on the partners' beginning capital investments; and sharing the remainder equally. 

Answer 1

Journal Entry	Plan 1(see note A)		Plan 2(see note B)		Plan 2(see note C)
Accounts Title & Explanation	Debit	Credit	Debit	Credit	Debit	Credit
Income	$249,000		&249,000		&249,000
Kara Ries Capital A/c		$83,000		$62,250		$79,000
Tammy Bax Capital A/c		$83,000		$87,150		$72,200
Joe Thomas Capital A/c		$83,000		$99,600		$97,800
(Being Income transferred to partner accounts)

Note A
If there is no agreement on the method of sharing the profits & loss it should be divided equally to all partner
So, Total Income is $249,000
Kara Ries (249,000/3)	83,000
Tammy Bax (249,000/3)	83,000
Joe Thomas (249,000/3)	83,000

Note B
Income devided to their capital investment ratio
Calculation of ratio of capital investment
Kara Ries (80,000/320,000 *100)	25%
Tammy Bax (112,000/320,000*100)	35%
Joe Thomas (128,000/320,000*100)	40%
Total Capital Invested all the partner	320,000
(80,000+112,000+128,000)
Calcualtion of partner share in income
Kara Ries (249,000*25%)	62,250
Tammy Bax (249,000*35%)	87,150
Joe Thomas (249,000*40%)	99,600
Total	249,000

Note C
Total Income	249,000
Kara Ries Salary	(66,000)
Tammy Bax Salary	(56,000)
Joe Thomas Salary	(80,000)
Income after salary	47,000
Interest on Kara ries capital(80,000*10%)	(8,000)
Interest on Tammy Bax capital(112,000*10%)	(11,200)
Interest on Joe Thomas capital(128,000*10%)	(12,800)
Income Remaning After salary & Interest on capital	15,000
This 15,000 has to divided equally
Kara Ries (15000/3)	5,000
Tammy Bax (15,000/3)	5,000
Joe Thomas (15,000/3)	5,000
Total Shares of Partner
Kara ries(66,000+8000+5,000)	79,000
Tammy Bax(56,000+11,200+5,000)	72,200
Joe Thomas(80,000+12,800+5,000)	97,800
Total Income	249,000