A and B organized a partnership and began operations on March 1, 2019. On that date, A invested 75,000 and B invested land and building with current fair value of 40,000 and 50,000 respectively. B also invested an additional 30,000 to the partnership on November 1, 2019 due to some cash flow issues. The partnership contract provides that an annual salary of 9,000 and 12,000 be provided to A and B, respectively. Interest on average capital balances of 10% shall also be provided. Any remainder profit or loss shall be allocated based on a 60:40 ratio. The annual salary was to be withdrawn by each partner in 12 monthly installments. During the fiscal year ending February 29, 2020, the partnership had sales amounting to 250,000, cost of goods sold of 140,000 and total operating expenses of 50,000 (excluding the partners’ salaries and interest on average capital balances. Each partner made monthly cash drawings in accordance with the partnership contract. Requirements: Compute for the share of A and B in the net income. Compute for the capital balance of each partner on March 1, 2020. Assuming that the annual salary of the partners are to be recognized as operating expenses and the total operating expenses of 50,000 already includes the partners’ salaries but excluding interest on their respective average capital balances, compute for the share of A in the net income.
Partnership Accounting
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings, admission of a new partner, etc.
Partner Admission and Withdrawal
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings of a partner, etc.
- A and B organized a partnership and began operations on March 1, 2019. On that date, A invested 75,000 and B invested land and building with current fair value of 40,000 and 50,000 respectively. B also invested an additional 30,000 to the partnership on November 1, 2019 due to some
cash flow issues.
The partnership contract provides that an annual salary of 9,000 and 12,000 be provided to A and B, respectively. Interest on average capital balances of 10% shall also be provided. Any remainder profit or loss shall be allocated based on a 60:40 ratio.
The annual salary was to be withdrawn by each partner in 12 monthly installments. During the fiscal year ending February 29, 2020, the partnership had sales amounting to 250,000, cost of goods sold of 140,000 and total operating expenses of 50,000 (excluding the partners’ salaries and interest on average capital balances. Each partner made monthly cash drawings in accordance with the partnership contract.
Requirements:
- Compute for the share of A and B in the net income.
- Compute for the capital balance of each partner on March 1, 2020.
- Assuming that the annual salary of the partners are to be recognized as operating expenses and the total operating expenses of 50,000 already includes the partners’ salaries but excluding interest on their respective average capital balances, compute for the share of A in the net income.
- Using the same information in letter c, compute for the capital balance of each partner on March 1, 2020.
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