Question

Problem 2 Land M are partners in Elem Co. each contributing $50,000 towards their capital. On March 31, 2018 the business reported the following: Sales turnover of $900,000 Cost of goods sold $400,000 Operating Expenses $200,000 1. Land M are to be paid a salary of $3,000 and $2,000 salary per month respectively. 2. Both the partners are to receive interest on capital @6% per annum. 3. Mis to receive a bonus of $30,000 if sales exceeded $600,000 in any year and L is to be paid a commission of 4% on all sales. 4. There was no agreement regarding the sharing of profits between partners. The provisions of the Partnership Act was to be applied in this case. REQUIRED: Prepare a statement to show the distribution of income between the partners. Determine the capital account balances of the partners on March 31, 2018.

Answer 1

Sales	$            900,000
less: cost of goods sold	$            400,000
Gross profit	$            500,000
Less: operating expenses	$            200,000
Net income	$            300,000

Distribution of net income of $300,000
	Partner L	Partner M	Total
Net income			$          300,000
Less: Annual salary (L = 3000*12) (M= 2000*12)	$              36,000	$                 24,000	$            60,000
Net income exceeds the total salary allowances			$          240,000
Less: Bonus and commissions (L = 900000*4%)	$              36,000	$                 30,000	$            66,000
Less: Interest allowance (Both = 50000*6%)	$                3,000	$                   3,000	$              6,000
Remaining net income			$          168,000
Remaining Net income allocated to L (168000/2)	$              84,000		$            84,000
Remaining Net income allocated to M (168000/2)		$                 84,000	$            84,000
When profit sharing ratio is no provided in the agreement. Then profit distributed to the equally to all partners.			$                     -
	Partner L	Partner M	Total
Interest	$                3,000	$                   3,000	$              6,000
Bonus and commission	$              36,000	$                 30,000	$            66,000
Salary	$              36,000	$                 24,000	$            60,000
Remaining Net income	$              84,000	$                 84,000	$          168,000
Allocated net income	$            159,000	$               141,000	$          300,000

	Partner L	Partner M	Total
Capital balanace at beginning	$              50,000	$                 50,000	$          100,000
Add: Allocated net income	$            159,000	$               141,000	$          300,000
Capital balanace at March 31, 2018	$            209,000	$               191,000	$          400,000