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, Clark's capital balance was $1,000,000 and Dave's was $900,000. Assuming each partner's 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 partner's 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 partner's share of earnings.

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.