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 $410,000, $340,000, and $170,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations:
Because of financial shortfalls encountered in getting the business started, Gray invests an additional $10,000 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 | 1,930 | 3,100 | 2,080 |
Stone | 1,640 | 2,500 | 1,820 |
Lawson | 3,300 | 1,580 | 1,510 |
Monet | 0 | 1,390 | 1,780 |
The partnership reports net income for 2016 through 2018 as follows:
2016 | $ | 98,000 |
2017 | (40,600) | |
2018 | 230,000 | |
Each partner withdraws the maximum allowable amount each year.
Determine the allocation of income for each of these three years.
Prepare in appropriate form a statement of partners’ capital for the year ending December 31, 2018.
a. | |||||
Income Allocation—2016 | Gray | Stone | Lawson | Total | |
Hours | 1930 | 1640 | 3300 | ||
Salary allowance ($8 per billable hour) | $15,440 | $13,120 | $26,400 | $54,960 | |
Interest (working Note A) | $50,000 | $40,800 | $20,400 | $111,200 | |
Bonus (not applicable salary and interest would have negative balance | $0 | $0 | $0 | $0 | |
Remaining loss (split evenly):($98,000 - ($54,960+$111200) | -$22,720 | -$22,720 | -$22,720 | -$68,160 | |
Profit allocation | $42,720 | $31,200 | $24,080 | $98,000 | |
Working Note A: Interest | Gray | Stone | Lawson | ||
Beginning Capital | $410,000 | $340,000 | $170,000 | ||
Interest 12% ; Gray = ($410,000 x 12% x 4/12)+($410,00+10000 )x12% x 8/12) | $50,000 | $40,800 | $20,400 | ||
Capital Account Balances—1/1/16 – 12/31/16 | |||||
Gray | Stone | Lawson | Total | ||
Beginning contributions | $410,000 | $340,000 | $170,000 | $920,000 | |
Added Investment | $10,000 | $0 | $0 | $10,000 | |
Profit allocation (from above) | $42,720 | $31,200 | $24,080 | $98,000 | |
Drawing (10% of beginning balances) | -$41,000 | -$34,000 | -$17,000 | -$92,000 | |
Ending balances | $421,720 | $337,200 | $177,080 | $936,000 | |
Income Allocation—2017 | Gray | Stone | Lawson | Monet | Total |
Hours | 3100 | 2500 | 1580 | 1390 | |
Salary allowance ($8 per billable hour) | $24,800 | $20,000 | $12,640 | $11,120 | $68,560 |
Interest (12% x Ending Bal of 2016) | $50,606.4 | $40,464 | $21,249.6 | $28,080 | $140,400 |
Bonus (not applicable salary and interest would have negative balance | $0 | $0 | $0 | $0 | $0 |
Remaining loss (split evenly):(-$40,600 - ($68560+$149,760) | -$62,390 | -$62,390 | -$62,390 | -$62,390 | -$249,560 |
Profit allocation | $13,016.4 | -$1,926 | -$28,500.4 | -$23,190 | -$40,600 |
Working Note B: Monet Capital | |||||
Monet's Investment = 20% ($936,000 + Monet's Investment) | |||||
.80 Monet's Investment = $187,200 | |||||
Monet's Investment | $234,000 | ||||
Capital Account Balances—1/1/17 – 12/31/17 | |||||
Gray | Stone | Lawson | Monet | Total | |
Beginning contributions | $421,720 | $337,200 | $177,080 | $234,000 | $1,170,000 |
Profit allocation (from above) | $13,016.4 | -$1,926 | -$28,500.4 | -$23,190 | -$40,600 |
Drawing (10% of beginning balances) | -$42,172 | -$33,720 | -$17,708 | -$23,400 | -$117,000 |
Ending balances | $392,564.4 | $301,554 | $130,871.6 | $187,410 | $1,012,400 |
Income Allocation—2018 | Gray | Stone | Lawson | Monet | Total |
Hours | 2080 | 1820 | 1510 | 1780 | |
Salary allowance ($8 per billable hour) | $16,640 | $14,560 | $12,080 | $14,240 | $57,520 |
Interest (12% x Ending Bal of 2017) | $47,107.73 | $36,186.48 | $15,704.59 | $22,489.2 | $121,488 |
Bonus (not applicable salary and interest would have negative balance | $4,249.33 | $4,249.33 | $0 | $0 | $8,498.67 |
Remaining loss (split evenly):($230,000 - ($57520 + 121,488 + 8498.67) | $10,623.33 | $10,623.33 | $10,623.33 | $10,623.33 | $42,493.33 |
Profit allocation | $78,620.39 | $65,619.15 | $38,407.93 | $47,352.53 | $230,000 |
Working Note C: Bonus = Grey and stone 10% each ; Total bonus = 20% | |||||
Bonus = 20% (Net income – Salary – Interest – Bonus) | |||||
Bonus = .20 ($230,000 – $57520– $121488 – Bonus) | |||||
Bonus | $8,498.67 | ||||
Bonus per person = $8498.67/2 | $4,249.33 | ||||
Capital Account Balances—1/1/18 – 12/31/18 | |||||
Gray | Stone | Lawson | Monet | Total | |
Beginning contributions | $392,564.4 | $301,554 | $130,871.6 | $187,410 | $1,012,400 |
Profit allocation (from above) | $78,620.39 | $65,619.15 | $38,407.93 | $47,352.53 | $230,000 |
Drawing (10% of beginning balances) | -$39,256.44 | -$30,155.4 | -$13,087.16 | -$18,741 | -$101,240 |
Ending balances | $431,928.35 | $337,017.75 | $156,192.37 | $216,021.53 | $1,141,160 |
b) | |||||
GRAY, STONE, AND LAWSON | |||||
Statement of Partners' Capital | |||||
For Year Ending December 31, 2018 | |||||
Gray | Stone | Lawson | Monet | Total | |
Beginning contributions | $392,564.4 | $301,554 | $130,871.6 | $187,410 | $1,012,400 |
Profit allocation (from above) | $78,620.39 | $65,619.15 | $38,407.93 | $47,352.53 | $230,000 |
Drawing (10% of beginning balances) | -$39,256.44 | -$30,155.4 | -$13,087.16 | -$18,741 | -$101,240 |
Ending balances | $431,928.35 | $337,017.75 | $156,192.37 | $216,021.53 | $1,141,160 |
Gray, Stone, and Lawson open an accounting practice on January 1, 2016, in San Diego, California,...
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 $420,000, $390,000, and $195,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations: Personal drawings are allowed annually up to an amount equal...
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 $290,000, $260,000, and $130,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations: Personal drawings are allowed annually up to an amount equal...
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 $340,000, $310,000, and $155,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations: Personal drawings are allowed annually up to an amount equal...
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...
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 $270,000, $240,000, and $120,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations: Personal drawings are allowed annually up to an amount equal...
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 Lawsoń contribute cash and other properties valued at $210,000, $180,000, and $90,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations: Personal drawings are allowed annually up to an amount equal...
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...
l 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 $210,000, $180,000, and $90,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations: • Personal drawings are allowed annually up to an...
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 $270,000, $240,000, and $120,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations: Personal drawings are allowed annually up to an amount equal...
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