Question

Boswell and Johnson form a partnership on May 1, 2016. Boswell contributes cash of $74,000; Johnson conveys title to the following properties to the partnership:

	Book Value		Fair Value
Land	$	27,000	$	52,000
Building and equipment		47,000		60,000

The partners agree to start their partnership with equal capital balances. No goodwill is to be recognized.

According to the articles of partnership written by the partners, profits and losses are allocated based on the following formula:

• Boswell receives a compensation allowance of $1,000 per month.
• All remaining profits and losses are split 60:40 to Johnson and Boswell, respectively.
• Each partner can make annual cash drawings of $5,000 beginning in 2017.

Net income of $23,000 is earned by the business during 2016.

Walpole is invited to join the partnership on January 1, 2017. Because of her business reputation and financial expertise, she is given a 40 percent interest for $78,000 cash. The bonus approach is used to record this investment, made directly to the business. The articles of partnership are amended to give Walpole a $4,000 compensation allowance per month and an annual cash drawing of $10,000. Remaining profits are now allocated:

Johnson	50	%
Boswell	10
Walpole	40

All drawings are taken by the partners during 2017. At year-end, the partnership reports an earned net income of $48,000.

On January 1, 2018, Pope (previously a partnership employee) is admitted into the partnership. Each partner transfers 10 percent to Pope, who makes the following payments directly to the partners:

Johnson	$	8,960
Boswell		13,784
Walpole		15,248

Once again, the articles of partnership must be amended to allow for the entrance of the new partner. This change entitles Pope to a compensation allowance of $1,100 per month and an annual drawing of $3,000. Profits and losses are now assigned as follows:

Johnson	42.5	%
Boswell	14.5
Walpole	33.0
Pope	10.0

For the year of 2018, the partnership earned a profit of $74,000, and each partner withdrew the allowed amount of cash.

Determine the capital balances for the individual partners as of the end of each year: 2016 through 2018.

Answer 1

Answer:

Inorder to prepare the statement of partners capital, first we need to allocate the income to the partners.

2016:

ALLOCATION OF NET INCOME—2016
	Boswell	Johnson	Total
Net Income			23,000
Salary	8,000	-	(8,000)
Remaining Income			15,000
Allocation based on 60:40 ratio	6,000	9,000	(15,000)
Total allocation	14,000	9,000	-

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2016
	Boswell	Johnson	Total
Beginning Balances	93,000	93,000	186,000
Net income allocation (above)	14,000	9,000	23,000
Drawings	-	-	-
Ending Balances	107,000	102,000	209,000

Admission of Walpole:

Walpole invested =  $78,000

So total capital = 186,000+23,000+78,000 =  $287,000.

Walpole is credited with a 40% interest, 40%* 287,000 = $114,800.

Then Bonus = 114,800 - 78,000 = 36,800

Out of 36,800, allocation from original partners = $22,080 is allocated from Johnson (60%) and $14,720

from Boswell (40%)

2017:

ALLOCATION OF NET INCOME—2017
	Boswell	Johnson	Walpole	Total
Net Income				48,000
Salary	12,000	-	48,000	(60,000)
Remaining Income				(12,000)
Allocation of income	(1,200)	(6,000)	(4,800)	(12,000)
Total allocation	10,800	(6,000)	43,200

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2017
	Boswell	Johnson	Walpole	Total
Beginning Balances	107,000	102,000	-	209,000
Walpoles Contribution	(14,720)	(22,080)	114,800	78,000
Net income allocation (above)	10,800	(6,000)	43,200	48,000
Drawings	(5,000)	(5,000)	(10,000)	(20,000)
Ending Balances	98,080	68,920	148,000	315,000

Admission of Pope:

Pope's payment was made directly to the partners. So, no goodwill or bonus will be recognized.

10% of capital balance of each partner will be reclassified to Pope.

2018:

ALLOCATION OF NET INCOME—2018
	Boswell	Johnson	Walpole	Pope	Total
Net Income					74,000
Salary	12,000	-	48,000	13200	(73,200)
Remaining Income					800
Allocation of income	116	340	264	80	(800)
Total allocation	12,116	340	48,264	13,280

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2018
	Boswell	Johnson	Walpole	Pope	Total
Beginning Balances	98,080	68,920	148,000	-	315,000
Admission of Pope	(9,808)	(6,892)	(14,800)	31,500	-
Net income allocation (above)	12,116	340	48,264	13,280	74,000
Drawings	(5,000)	(5,000)	(10,000)	(3,000)	(23,000)
Ending Balances	95,388	57,368	171,464	41,780	366,000