Boswell and Johnson form a partnership on May 1, 2016. Boswell contributes cash of $50,000; Johnson conveys title to the following properties to the partnership: Book value Fair value Land $15000 $28000 Building and equipment 35000 36000 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:∙ Boswell receives a compensation allowance of $1,000 per month.∙ All remaining profits and losses are split 60:40 to Johnson and Boswell, respectively.∙ Each partner can make annual cash drawings of $5,000 beginning in 2017.Net income of $11,000 is earned by the business during 2016.Walpole is invited to join the partnership on January 1, 2017. Because of her business reputation and financial expertise, she is given a 40 percent interest for $54,000 cash. The bonus approach is used to record this investment, made directly to the business. The articles of partnership are amended to give Walpole a $2,000 compensation allowance per month and an annual cash drawing of $10,000. Remaining profits are now allocated: Johnson . . . . . . . . . . . . . . . . . . . . 48%Boswell . . . . . . . . . . . . . . . . . . . . . 12Walpole . . . . . . . . . . . . . . . . . . . . . 40 All drawings are taken by the partners during 2017. At year-end, the partnership reports an earned net income of $28,000.On January 1, 2018, Pope (previously a partnership employee) is admitted into the partnership. Each partner transfers 10 percent to Pope, who makes the following payments directly to the partners: Johnson . . . . . . . . . . . . . . . . . . $ 5,672Boswell . . . . . . . . . . . . . . . . . . . . 7,880Walpole . . . . . . . . . . . . . . . . . . .. . 8,688 Once again, the articles of partnership must be amended to allow for the entrance of the new partner. This change entitles Pope to a compensation allowance of $800 per month and an annual drawing of $4,000. Profits and losses are now assigned as follows: Johnson . . . . . . . . . . . . . . . . . . . 40.5%Boswell . . . . . . . . . . . . . . . . . . . . . 13.5Walpole . . . . . . . . . . . . . . . . . . . . . 36.0Pope . . . . . . . . . . . . . . . . . . . . . . . 10.0 For the year of 2018, the partnership earned a profit of $46,000, and each partner withdrew the allowed amount of cash.Determine the capital balances for the individual partners as of the end of each year: 2016 through 2018.
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.
Boswell and Johnson form a
| Book value | Fair value | |
| Land | $15000 | $28000 |
| Building and equipment | 35000 | 36000 |
The partners agree to start their partnership with equal capital balances. No
recognized.
According to the articles of partnership written by the partners,
∙ Boswell receives a compensation allowance of $1,000 per month.
∙ All remaining profits and losses are split 60:40 to Johnson and Boswell, respectively.
∙ Each partner can make annual cash drawings of $5,000 beginning in 2017.
Net income of $11,000 is earned by the business during 2016.
Walpole is invited to join the partnership on January 1, 2017. Because of her business reputation
and financial expertise, she is given a 40 percent interest for $54,000 cash. The bonus approach is used to record this investment, made directly to the business. The articles of partnership are amended to give Walpole a $2,000 compensation allowance per month and an annual cash drawing of $10,000. Remaining profits are now allocated:
Johnson . . . . . . . . . . . . . . . . . . . . 48%
Boswell . . . . . . . . . . . . . . . . . . . . . 12
Walpole . . . . . . . . . . . . . . . . . . . . . 40
All drawings are taken by the partners during 2017. At year-end, the partnership reports an earned net income of $28,000.
On January 1, 2018, Pope (previously a partnership employee) is admitted into the partnership. Each partner transfers 10 percent to Pope, who makes the following payments directly to the
partners:
Johnson . . . . . . . . . . . . . . . . . . $ 5,672
Boswell . . . . . . . . . . . . . . . . . . . . 7,880
Walpole . . . . . . . . . . . . . . . . . . .. . 8,688
Once again, the articles of partnership must be amended to allow for the entrance of the new partner. This change entitles Pope to a compensation allowance of $800 per month and an annual drawing of $4,000. Profits and losses are now assigned as follows:
Johnson . . . . . . . . . . . . . . . . . . . 40.5%
Boswell . . . . . . . . . . . . . . . . . . . . . 13.5
Walpole . . . . . . . . . . . . . . . . . . . . . 36.0
Pope . . . . . . . . . . . . . . . . . . . . . . . 10.0
For the year of 2018, the partnership earned a profit of $46,000, and each partner withdrew the allowed amount of cash.
Determine the capital balances for the individual partners as of the end of each year: 2016 through 2018.
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