Gray, Stone, and Lawson open an accounting practice on January 1, 2016, in San D
ID: 2392511 • 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 $330,000, $300,000, and $160,000, 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:
A salary allowance is credited to each partner in an amount equal to $8 per billable hour worked by that individual during the year.
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).
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.
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 $9,200 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:
The partnership reports net income for 2016 through 2018 as follows:
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.
2016 2017 2018 Gray 1,840 3,000 2,000 Stone 1,560 1,700 1,700 Lawson 2,500 1,500 1,400 Monet 0 1,290 1,620Explanation / Answer
Allocation of income for year 2016:
Profit and Loss Appropriation A/c
for the year ended 31st December 2016
Amount
To interest on capital
Gray 19800
Stone 18000
Lawson 9600
47400
By balance b/d
To salary
Gray. 14720
Stone 12480
Lawson 20000
47200
To bonus
Gray. 18
Stone 18
36
To net profit transferred to
Gray. 121
Stone. 121
Lawson. 122
Total
364
95000
Total
95000
Profit and loss Appropriation A/c
For the year ended 31st December 2017
by net loss transferred to
Gray. 37315
Stone. 37316
Lawson 37316
Monet. 37316
149263
To interest on capital
Gray. 20451
Stone. 18037
Lawson. 10423
Money. 8152
57063
To Salary
Gray. 24000
Stone. 13600
Lawson . 12000
Monet. 9600
59200
Profit And loss Appropriation A/c
For the year ended 31st December 2018
To interest on capital
Gray. 18834
Stone. 15893
Lawson . 8487
Monet . 6163
49377
To salary
Gray. 16000
Stone. 13600
Lawson 11200
Monet. 12960
53760
To bonus
Gray. 3494
Stone. 3494
6988
To net profit transferred to
Gray. 17468
Stone. 17469
Lawson. 17469
Monet. 17468
Total
69875
=180000
Total
180000
Partners Capital A/c
For the year ended 31st December 2018
3494
Calculations of capital for the year ended 2016 and 2017
Contribution of Monet :-
20% of book value as on 1.1.2017:-
340859+300619+173722=815200*20/120=135867
Particular Amount ParticularAmount
To interest on capital
Gray 19800
Stone 18000
Lawson 9600
47400
By balance b/d
95000To salary
Gray. 14720
Stone 12480
Lawson 20000
47200
To bonus
Gray. 18
Stone 18
36
To net profit transferred to
Gray. 121
Stone. 121
Lawson. 122
Total
364
95000
Total
95000
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