Question

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Problem 12-4A Partnership income allocation, statement of partners' equity, and closing entries LO P2

Mo, Lu, and Barb formed the MLB Partnership by making investments of $67,500, $262,500, and $420,000, respectively. They predict annual partnership net income of $450,000 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 $80,000 to Mo, $60,000 to Lu, and $90,000 to Barb; interest allowances of 10% on their initial capital investments; and the remaining balance shared as follows: 20% to Mo, 40% to Lu, and 40% to Barb.

Problem 12-4A Part 1

Required:
1. Use the table to show how to distribute net income of $450,000 for the calendar year under each of the alternative plans being

Income (Loss) Sharing Plan Plan (a) Mo Lu Barb Total Net Income (loss) $450,000 Balance allocated equally 1/3 $150,000 1/3 $150,000 $150,000 450,000 Balance of income (loss) $0 Shares to the partners $150,000 $150,000 $150,000 $450,000 Plan (b) Mo Lu Barb Total Net Income (loss) $450,000 Balance allocated in proportion to initial investments 1/2 $45,000 1/3 $45,000 $45,000 135,000 Balance of income (loss) $315,000 Shares to the partners $45,000 $45,000 $45,000 $135,000 Plan (c) Mo Lu Barb Total Net income (loss) $450,000 Salary allowances 0 Balance of income (loss) Interest allowances 0 Balance of income (loss) Balance allocated 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0 $0

Answer 1

	Calculations	Mo	Lu	Barb	Total
a	Profit	$           1,50,000	$           1,50,000	$         1,50,000	$        4,50,000
b	Profit	$               40,500	$           1,57,500	$         2,52,000	$        4,50,000
c	Profit				$        4,50,000
	Salary Allowances	$               80,000	$              60,000	$             90,000	$        2,30,000
	Interest allowances	$                 6,750	$              26,250	$             42,000	$           75,000
	Total Salary and interest allocation	$               86,750	$              86,250	$         1,32,000	$        3,05,000
	Balance of Profit				$        1,45,000
	Balance allocated equally	$               29,000	$              58,000	$             58,000	$        1,45,000
	Balance of Profit				$                    -
	Shares of Partners	$           1,15,750	$          1,44,250	$         1,90,000	$        4,50,000