Question

Gray, Stone, and Lawson open an accounting practice on January 1, 2016, 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 $270,000, $240,000, and $120,000, 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 $7 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 there will be no bonus if there is a net loss or if salary and interest result in a negative remainder of net income to be distributed.
4. Any remaining partnership profit or loss is to be divided evenly among all partners.

Because of financial shortfalls encountered in getting the business started, Gray invests an additional $9,200 on May 1, 2016. On January 1, 2017, the partners allow Monet to buy into the partnership. Monet contributes cash directly to the business in an amount equal to a 20 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:

	2016	2017	2018
Gray	1,770	2,400	1,940
Stone	1,500	1,600	1,680
Lawson	1,900	1,440	1,370
Monet	0	1,250	1,640

The partnership reports net income for 2016 through 2018 as follows:

2016	$	62,000
2017		(26,600)
2018		162,000

Each partner withdraws the maximum allowable amount each year.

1. Determine the allocation of income for each of these three years.

2. Prepare in appropriate form a statement of partners’ capital for the year ending December 31, 2018.

Req A 2016 Req A 2017 Req A 2018 Req B Determine the allocation of income for 2016. (Loss amounts should be indicated with a minus sig calculations. Round your answers to the nearest dollar amounts.) Income Allocation-2016 Stone Gray Lawson Totals Salary allowance 12,390 10,500 13,300$ 36,190 $ 28,800 33,136 14,400 Interest 76,336 Bonus 0 Remainder to allocate (16,842) (16,842) (16,842) (50,526) 28,684 22,458 Income allocation 10,858 $ 62,000

Answer 1

Part A

Income Allocation—2016

	Gray	Stone	Lawson	Total
Salary allowance	12390	10500	13300	36190
Interest	33136	28800	14400	76336
Bonus	0	0	0	0
Remaining loss	(16842)	(16842)	(16842)	(50526)
Profit allocation	28684	22458	10858	62000

Explanation:

	Gray	Stone	Lawson	Total
Salary allowance	12390 (1770*7)	10500 (1500*7)	13300 (1900*7)	36190
Interest	33136 ((270000*12%*4/12)+(279200*12%*8/12))	28800 (240000*12%)	14400 (120000*12%)	76336
Bonus	0	0	0	0
Remaining loss (62000-36190-76336 = -50526)	(16842) (-50526/3)	(16842) (-50526/3)	(16842) (-50526/3)	(50526)
Profit allocation	28684	22458	10858	62000

Bonus is not applicable here because salary and interest would necessitate a negative bonus

	Gray	Stone	Lawson	Total
Beginning contributions	270000	240000	120000	1005000
Added Investment	9200	0	0	9400
Profit allocation	28684	22458	10858	62000
Drawing (10% of beginning capital)	(27000)	(24000)	(12000)	100500
Ending balances	280884	238458	118858	638200

Monet's Investment = 20%* ($638200 + Monet's Investment)

0.80 Monet's Investment   = 127640

Monet's Investment   = 159550

Part A

Income Allocation—2017

	Gray	Stone	Lawson	Monet	Total
Salary allowance	16800	11200	10080	8750	46830
Interest	33706	28615	14263	19146	95730
Bonus	0	0	0	0	0
Remaining loss	(42290)	(42290)	(42290)	(42290)	(169160)
Loss allocation	8216	(2475)	(17947)	(14394)	(26600)

Explanation:

	Gray	Stone	Lawson	Monet	Total
Salary allowance	16800 (2400*7)	11200 (1600*7)	10080 (1440*7)	8750 (1250*7)	46830
Interest	33706 (280884*12%)	28615 (238458*12%)	14263 (118858*12%)	19146 (159550*12%)	95730
Bonus	0	0	0	0	0
Remaining loss (-26600-46830-95730) = -169160	(42290) (-169160/4)	42290) (-169160/4)	42290) (-169160/4)	42290) (-169160/4)	(169160)
Loss allocation	8216	(2475)	(17947)	(14394)	(26600)

	Gray	Stone	Lawson	Monet	Total
Beginning contributions	280884	238458	118858	159550	797750
Loss allocation	8216	(2475)	(17947)	(14394)	-26600
Drawing (10% of beginning capital)	(28088)	(23846)	(11886)	(15955)	-79775
Ending balances	261012	212137	89025	129201	691375

Part A

Income Allocation—2018

	Gray	Stone	Lawson	Monet	Total
Salary allowance	13580	11760	9590	11480	46410
Interest	31321	25456	10683	15504	82964
Bonus	2719	2719			5438
Remaining profit	6797	6797	6797	6797	27188
Profit allocation	54417	46732	27070	33781	162000

Explanation:

	Gray	Stone	Lawson	Monet	Total
Salary allowance	14770 (1940*7)	12810 (1680*7)	10640 (1370*7)	12530 (1640*7)	46410
Interest	47845 (398709*12%)	41409     (345071*12%)	17882 (149018*12%)	24368 (203063*12%)	82964
Bonus	2719	2719			5438
Remaining profit (162000-46410-82964-5438) = 27188	6797	6797	6797	6797	27188
Profit allocation	54417	46732	27070	33781	162000

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

B = 0.2 ($162000 – $46410 – $82964 – B)

B = 0.2 ($32626 – B)

B = $6525.20 – .2B

     1.2 B = $6525.20

B = $5438 (or $2719 per person)

Part B

GRAY, STONE, LAWSON and MONET

Statement of partner’s capital

For the year ending December 31, 2018

	Gray	Stone	Lawson	Monet	Total
Beginning balances	261012	212137	89025	129201	691375
Profit allocation	54417	46732	27070	33781	162000
Drawings (10% of beginning capital)	(26101)	(21214)	(8903)	(12920)	-69138
Ending balances	289328	237655	107192	150062	784237