Formation of a Partnership and Allocation of Profit and Loss
Haskins and Sells formed a partnership on January 2, 20X3. Each had been a sole proprietor before forming their partnership.
Each partner's contributions follow. The amounts under the cost column represent the amounts reported on the books of each sole proprietorship immediately before the formation of the partnership.
| Cost | Fair Value |
Haskins: |
|
|
Cash | $ 45,000 | $ 45,000 |
Inventories (FIFO) | 48,000 | 49,000 |
Trade accounts receivable | 40,000 | 40,000 |
Allowance for uncollectible accounts | (1,500) | (2,000) |
Building | 550,000 | 370,000 |
Accumulated depreciation | (200,000) |
|
Mortgage on building assumed by partnership | (175,000) | (175,000) |
Sells: |
|
|
Cash | $ 10,000 | $ 10,000 |
Trade accounts receivable | 30,000 | 30,000 |
Allowance for uncollectible accounts | (2,000) | (2,500) |
Inventories (FIFO) | 15,000 | 13,500 |
Note receivable due in 6 months | 50,000 | 50,000 |
Temporary investments | 100,000 | 81,500 |
Customer lists | -0- | 60,000 |
Using the preceding information, prepare a classified balance sheet as of January 2, 20X3, for the Haskins and Sells Partnership. Assume that $25,000 of the mortgage is due in 20X3 and that the customer lists are accounted for as an intangible asset to be amortized over a five-year period.
During 20X3, the Haskins and Sells Partnership reported the following information:
Revenues | $650,000 |
Cost of goods sold | 320,000 |
Selling, general, and administrative expenses | 70,000 |
Salaries paid to each partner (not included in selling, general, |
|
and administrative expenses): |
|
Haskins | 90,000 |
Sells | 70,000 |
Bonus paid to Haskins (not included in selling, general, | 10% of net income |
and administrative expenses) |
|
Withdrawals made during the year in addition to salaries: |
|
Haskins | 10,000 |
Sells | 5,000 |
Residual profit and loss-sharing ratio: |
|
Haskins | 20% |
Sells | 80% |
a. Prepare an income statement for the Haskins and Sells Partnership for the year ended December 31, 20X3.
b. Prepare a schedule that shows how to allocate the partnership net income for 20X3.
c. What are the partners' capital balances that will appear on the December 31, 20X3, balance sheet?
d. Assume that the distribution of partnership net income remains the same (i.e., Haskins will continue to receive a 10 percent bonus and salaries will continue to be $90,000 and $70,000 to Haskins and Sells, respectively) and that the residual profit and loss-sharing ratio will continue to be 20:80. What would partnership net income have to be for each partner to receive the same amount of income?
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