Gray, Stone, and Lawson open an accounting practice on January 1, 2016, in San D
ID: 2392014 • Letter: G
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 $390,000, $360,000, and $180,000, 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 $7 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 $8,600 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 1,890 3,600 2,060 Stone 1,620 2,100 1,800 Lawson 3,100 1,560 1,490 Monet 0 1,370 1,760 The partnership reports net income for 2016 through 2018 as follows: 2016 $ 101,000 2017 (38,400) 2018 243,000 Each partner withdraws the maximum allowable amount each year. A. Determine the allocation of income for each of these three years. B. Prepare in appropriate form a statement of partners’ capital for the year ending December 31, 2018.
Explanation / Answer
B.
2016 Gray Stone Lawson Total Billable hours (A) 1,890 1,620 3,100 6,610 Rate per hour (B) 7 7 7 7 Salary allowance (C=A*B) 13,230 11,340 21,700 46,270 average monthly balance (D) 395,733 360,000 180,000 935,733 (390000*4/12)+(398600*8/12) Rate of Interest ('E) 12% 12% 12% 12% Interest (F=D*E) 47,488 43,200 21,600 112,288 Net Income 101000 Less: Salary Allowance 46270 Less: Interest on Partner's Capital 112288 Less: Bonus 0 Profit /(Loss to be distibuted) (G) -57558 No bonus is being paid for 2016 as the salary and interest result in negative rainder of net income Gray Stone Lawson Total Beginning Capital Balance for 2016 390,000 360,000 180,000 930,000 Add: Investment 8,600 - - 8,600 Add:Salary allowance 13,230 11,340 21,700 46,270 Add:Interest 47,488 43,200 21,600 112,288 Less:Loss (57558/3) - 19,186 - 19,186 - 19,186 - 57,558 Less:Drawings (10%) - 39,000 - 36,000 - 18,000 - 93,000 Ending Capital Balance for 2016 401,132 359,354 186,114 946,600 Monet's Investment = 20% ($946600 + Monet's Investment) Ml = $189320 + .20 Ml 189320 .80 Ml = $189320 236650 Ml = $236650Related Questions
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