Question

Required information Problem 12-4A Partnership income allocation, statement of partners' equity, and closing entries LO P2 [The following information applies to the questions displayed below.] Mo Meek, Lu Ling, and Barb Beck formed the MLB Partnership by making capital contributions of $77,400, $301,000, and $481,600, respectively. They predict annual partnership net income of $508,500 and are considering the following alternative plans of sharing income and loss: (a) equally; (b) in the ratio of their initial capital investments; or (c) salary allowances of $84,400 to Mo, $63,300 to Lu, and $95,500 to Barb; interest allowances of 10% on their initial capital investments; and the balance shared as follows: 20% to Mo, 40% to Lu, and 40% to Barb.

Problem 12-4A Part 2 2. Prepare a statement of partners’ equity showing the allocation of income to the partners assuming they agree to use plan (c), that income earned is $227,700, and that Mo, Lu, and Barb withdraw $40,500, $54,500, and $70,500, respectively, at year-end. (Do not round intermediate calculations. Enter all allowances as positive values. Enter losses as negative values.)

Answer 1

Problem 12-4 A:

a) Equally:

Income allocation Statement
	Mo Meek ($)	Lu Ling ($)	Barb Beck ($)	Total ($)
Net Income Equally	169500	169500	169500	508500
Total	169500	169500	169500	508500

As partners share the income of partnership equally. The Income is divided among partners equally (i.e.,) $508,500/3 = $169,500

Statement of Partner's Equity
	Mo Meek ($)	Lu Ling ($)	Barb Beck ($)	Total
Beginning Capital Balance	77,400	3,01,000	4,81,600	8,60,000
(+) Net Income	169500	169500	169500	508500
Closing Capital Balance	2,46,900	4,70,500	6,51,100	13,68,500

As there are no other items except Net income share, it is added to the capital accounts of the partners to get the closing Balance.

Closing Entries for Lo P2:

Particulars	Debit ($)	Credit ($)
Income Summary Dr	508,500
To Mo Meek's Capital a/c		169,500
To Lu Ling's Capital a/c		169,500
To Bark Beck's Capital a/c		169,500

In the Closing Entry the Net income of the partnership is transferred to the partner's capital a/c in equal proportion.

b) In the Ratio of the Capital Investment:

The Ratio of Capital Investment = 77,400 : 301,000 : 481,600. it can be simplified by dividing by 20 which = 387 : 1505 : 2408

Income allocation Statement
	Mo Meek ($)	Lu Ling ($)	Barb Beck ($)	Total ($)
Net Income Equally	45765	177975	284760	508500
Total	45765	177975	284760	508500

As partners share the income of partnership in the proportion of their capital which is 387:1505:2408 . The Income is divided among partners as follows.

Mo Meek = (508,500/4300)*387 = 45,765

Lu Ling = (508,500/4300)*1505 = 177,975

Barb Beck = (508,500/4300)*2408 = 284,760

Statement of Partner's Equity
	Mo Meek ($)	Lu Ling ($)	Barb Beck ($)	Total
Beginning Capital Balance	77,400	3,01,000	4,81,600	8,60,000
(+) Net Income	45765	177975	284760	508500
Closing Capital Balance	1,23,165	4,78,975	7,66,360	13,68,500

As there are no other items except Net income share, it is added to the capital accounts of the partners to get the closing Balance.

Closing Entries for Lo P2:

Particulars	Debit ($)	Credit ($)
Income Summary Dr	508,500
To Mo Meek's Capital a/c		45,765
To Lu Ling's Capital a/c		177,975
To Bark Beck's Capital a/c		284,760

In the Closing Entry the Net income of the partnership is transferred to the partner's capital a/c in the proportion of their Capital.

c) Salary Allowance, Interest allowance and Net profit:

Income allocation Statement
	Mo Meek ($)	Lu Ling ($)	Barb Beck ($)	Total ($)
Salary Allowance	84,400	63,300	95,500	2,43,200
Interest allowance (10% of Beginning Capital)	7740 (77,400*10%)	30100 (301,000*10%)	48160 (481,600*10%)	86000
Reminder (20%:40%:40%)	35860 (179,300*20%)	71720 (179,300*40%)	71720 (179,300*40%)	179,300
Net Income	1,28,000	1,65,120	2,15,380	5,08,500

Salary Allowance to each Partner is Given in the question.

Interest Allowance is calculated at 10% of their initial investment.

It is given that Remaining income is shared in the ratio of 20% to Mo, 40% to Lu and 40% to Barb. Remaining Income = Total Income - (Salary allowance + Interest Allowance)   = 508,500 - (243,200+86,000) = $179,300

Remaining Income of $179,300 is divided among partners in 20%:40%:40% ratio.

Closing Entries for Lo P2:

Particulars	Debit ($)	Credit ($)
Income Summary Dr	508,500
To Mo Meek's Capital a/c		128,000
To Lu Ling's Capital a/c		165,120
To Bark Beck's Capital a/c		215,380

In the Closing Entry the Net income of the partnership is transferred to the partner's capital a/c.