Question

At the end of its first year of operations on December 31, 2020, Carla Vista Company’s accounts show the following.

Partner		Drawings		Capital
Art Niensted		$22,900		$49,700
Greg Bolen		13,500		33,000
Krista Sayler		11,800		26,500

The capital balance represents each partner’s initial capital investment. Therefore, net income or net loss for 2020 has not been closed to the partners’ capital accounts.

To record the division of net income for the year 2020 under each of the following independent assumptions.

1.		Net income is $30,100. Income is shared 6:3:1.
2.		Net income is $40,500. Niensted and Bolen are given salary allowances of $14,500 and $10,400, respectively. The remainder is shared equally.
3.		Net income is $19,100. Each partner is allowed interest of 10% on beginning capital balances. Niensted is given a $14,180 salary allowance. The remainder is shared equally.

(a)

Prepare a schedule showing the division of net income under assumption (3) above. (If an amount reduces the account balance then enter with a negative sign preceding the number e.g. -15,000 or parenthesis e.g. (15,000).)

DIVISION OF NET INCOME
		Art Niensted		Greg Bolen		Krista Sayler		Total
Salary allowance		$enter a dollar amount		enter a dollar amount		enter a dollar amount		$enter a total for the row
Interest allowance on capital		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a total for the row
Total salaries and interest		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts
Remaining excess/ deficiency		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a total for the row
Total division of net income		$enter a total amount		$enter a total amount

Answer 1

a.

In a partnership, the Net income is divided among the partners after providing for salary allowance, interest allowance, etc. If the balance after allowing these is an excess, it is also added to partners capital, in an agreed ratio. If it is a deficit, its is deducted from their capital.

Assumption (3):

Salary allowance is provided only to Art Niensted for $14,180.

Interest allowance on capital is provided at 10% on beginning capital balances.

Interest allowance for

Art Niensted = $49,700 × 10% = $4,970

Greg Bolen = $33,000 × 10% = $3,300

Krista Sayler = $26,500 × 10% = $2,650

Remaining excess/deficiency after providing for salary allowance and interest allowance = Net income - (Salary allowance + Interest allowance)

= $19,100 - ($14,180 + $4,970 + $3,300 + $2,650) = -$6,000

Here, Total of salary allowance and interest allowance exceeds the Net Income. Therefore, it is a deficiency.

The deficiency is shared equally ($6,000/3 = $2,000) among the partners.