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 $280,000, $250,000, and $125,000, 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 $8 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 $9,600 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	1,780	2,500	1,950
Stone	1,510	1,700	1,690
Lawson	2,000	1,450	1,380
Monet	0	1,260	1,650

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

2016	$	80,000
2017		(27,400)
2018		188,000

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.
   Complete this question by entering your answers in the tabs below. 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 sign. Do not round intermediate calculations. Round your answers to the nearest dollar amounts.) Income Allocation-2016 Gray Stone Lawson Totals Salary allowance Interest Bonus Remainder to allocate Income allocation Req A 2016 Req A 2017>
   

Answer 1

Assumptions:

1. No drawings has been made during the period of 3 years.

2. Salary Income, Interest income, Bonus and distribution of remainder income is done through capital account

Income allocation 2016 ($)
	Gray	Stone	Lawson	Totals
Salary Allowance	14240	12080	16000	42320
Interest	34368	30000	15000	79368
Bonus
Income				80000
Remainder				-41688
Remainder to Allocation	-13896	-13896	-13896	-41688
Income allocation	34712	28184	17104	80000

Income allocation 2017 ($)
	Gray	Stone	Lawson	Monet	Totals
Salary Allowance	20000	13600	11600	10080	55280
Interest	38917	33382	17052	22338	111690
Bonus
Income					(27,400)
Remainder					(194,370)
Remainder to Allocate	(48,593)	(46,097)	(46,097)	(46,097)	(186,882)
Income allocation	10,325	886	(17,444)	(13,679)	(19,912)

Income allocation 2018 ($)
	Gray	Stone	Lawson	Monet	Totals
Salary Allowance	15,600	13,520	11,040	13,200	53,360
Interest	40,156	33,488	14,959	20,697	109,301
Bonus	2,112	2,112			4,224
Income					188,000
Remainder					21,115
Remainder to Allocate	5,279	5,279	5,279	5,279	21,115
Income allocation	63,147	54,399	31,278	39,175	188,000

Statement of Partner's Capital for the Year Ending Dec 2018 ($)
	Gray	Stone	Lawson	Monet	Totals
Beginning Balance	334,637	279,070	124,660	172,472	910,838
Profit Allocation	63,147	54,399	31,278	39,175	188,000
Drawings					-
Ending Balance	397,784	333,469	155,938	211,647	1,098,838