Monville and Tucker form a partnership on July 1, 2013. Monville contributes cas

Question

Monville and Tucker form a partnership on July 1, 2013. Monville contributes cash of $80,000. Tucker conveys title to a building and equipment with a total book value of $80,000 and total fair market value of $110,000. The partners agree to start their partnership with equal capital balances. No goodwill is to be recognized.

According to the articles of partnership written by the partners, profits and losses are allocated based on the following formula:

>Monville receives a compensation allowance of $1,000 per month

>All remaining profits and losses are split 60:40 to Tucker and Monville, respectively

>Each partner can make annual cash draws of $5,000 beginning in the first full calendar year of the partnership

During 2013, the partnership earned $15,000 of net income.

On January 1, 2014, Miller was invited to join the partnership. Based on her business relationship and client list, she is given a 40% interest for $54,000 of cash, paid directly to the partnership. The bonus approach is used to record the investment. The articles of partnership are amended to give Miller $2,000 compensation allowance per month and an annual cash draw of $10,000. The new partner will receive credit for the intangibles conveyed along with the cash for the partnership interest (i.e., the new partner’s capital account will be credited). Remaining profits are now allocated 48:12:40 to Tucker, Monville and Miller respectively. The partnership earned $40,000 in 2014 and all draws are taken by the partners during 2014.

The partnership’s business continues to grow. As a result, on January 1, 2015, Taylor, an employee, is admitted to the partnership. Each partner transfers 10 percent to Taylor, who makes the following payments to the partners:

Tucker $6,760

Monville $9,100

Miller $10,140

The articles of partnership are amended to allow for the entrance of Taylor. It entitles her to a compensation allowance of $800 per month and an annual draw of $4,000. Profits and losses are allocated 41:13:36:10 to Tucker, Monville, Miller and Taylor respectively. For 2015, the partnership earned $56,000 and all draws are taken by the partners.

**** Required: Prepare an income allocation and a capital account balance schedule for 2013, 2014 and 2015. Include any additional computations are explanations that support your schedules.

Explanation / Answer

Income Allocation Account For the Year 2013

Capital Account Balance Schedule of Partners as on 31st December 2013

Initial Contribution of Tucker is equal to the Fair Value of Equipment

Capital Account Balance Schedule of Partners as on 31st December 2014

Income Allocation Schedule of 2014

Note: Capital Contributed by Tucker and Monvile before addition were $1,14,000 and $93,000. Tucker Contributed Cash of $54,000 for 40% interest hence his total capital will be 40% of (1,14,000+93,000+54,000)= $1,04,400. Difference between his capital contribution and his share is debited to the Old Partners in their old profit sharing ratio and credited to Miller's Capital Account.

Capital Account Balance Schedule of Partners as on 31st December 2015

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