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

Req A 2017 Req A 2018 Req A 2016 Req B Determine the allocation of income for 2017. (Loss amounts should be indicated with a

Complete this question by entering your answers in the tabs below. Req A 2018 Req A 2016 Req A 2017 Req B Determine the alloc

Req A 2017 Req A 2016 Req A 2018 Req B Prepare in appropriate form a statement of partners capital for the year ending Decem

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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

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