Question

Clark and Dave are partners in the Company. following manner: They share income and losses in the (1) Each partner is to receive a salary of $75,000; (2) Each partner is to receive 5% interest on beginning capital balances; and (3) Any remainder profit/loss is to be split in a ratio of 6:4 (Clark/Dave). The partners withdraw an amount equal to their salary each year. On January 1, 2017, Clarks capital balance was $1,000,000 and Daves was $900,000. Assuming each partners share of income is added to his capital account and withdrawals deducted each year. Prepare a worksheet for the division of net income and journal entries for the allocation of profits and closing out of withdrawals for 2017 and 2018. Prepare T - accounts for each partners capital account listing beginning balances, share of profits, deduction of withdrawals, and ending balances as of December 31, 2017 and December 31, 2018 under the following assumptions. Required: a. What will the capital account balances for Clark and Dave be at December 31, b. What will be the capital account balances for Clark and Dave be at December 31, c. Explain why a partnership would have a net income allocation formula that used a 2017, if the company realizes net income of $380,000 in 2017? 2018 if net income is $440,000 in 2018? salary and interest allowance in the calculation of each partners share of earnings.

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Answer #1

Part A

Income distribution 2017

Clark

Dave

Interest (5% of beginning capital balance)

50000 (1000000*5%)

45000 (900000*5%)

Salary

75000

75000

6:4 spilt of remaining $135000 income (380000-50000-45000-75000-75000)

81000 (135000*6/10)

54000 (135000*4/10)

Total

206000

174000

Date

Account titles and explanation

Debit

Credit

December 31, 2017

Income summary

380000

Clark, capital

206000

Dave, capital

174000

Capital Balances as of December 31, 2017:

Clark

Dave

Initial 2017 investment

1000000

900000

2017profit allocation

206000

174000

2017 drawings

(75000)

(75000)

Capital balances December 31, 2017

1131000

999000

Date

Account titles and explanation

Debit

Credit

December 31, 2017

Clark, capital

75000

Dave, capital

75000

Clark, drawings

75000

Dave, drawings

75000

Part B

Income distribution 2018

Clark

Dave

Interest (5% of beginning capital balance)

56550 (1131000*5%)

49950 (999000*5%)

Salary

75000

75000

6:4 spilt of remaining $183500 income (440000-56550-49950-75000-75000)

110100 (183500*6/10)

73400 (183500*4/10)

Total

241650

198350

Date

Account titles and explanation

Debit

Credit

December 31, 2017

Income summary

440000

Clark, capital

241650

Dave, capital

198350

Capital Balances as of December 31, 2017:

Clark

Dave

Initial 2018 investment

1131000

999000

2018 profit allocation

241650

198350

2018 drawings

(75000)

(75000)

Capital balances December 31, 2018

1297650

1122350

Date

Account titles and explanation

Debit

Credit

December 31, 2018

Clark, capital

75000

Dave, capital

75000

Clark, drawings

75000

Dave, drawings

75000

Part C

A partnership would have a net income allocation formula that used a salary and interest allowance in the calculation of each partner’s share of earnings because it helps in determining the amount the each partner will withdraw in cash from the business during that particular year, in anticipation of their net income share.

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