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 $210,000, $180,000, and $90,000, 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 $8 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 $9,100 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 25 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 1710 1800 1880 Stone 1440 1500 1620 Lawson 1300 1380 1310 Monet -0- 1190 1580 The partnership reports net income for 2016 through 2018 as follows: 2016 . . . . . . . . . . . . . . . $ 65,0002017 . . . . . . . . . . . . . . . (20,400) 2018 . . . . . . . . . . . . . . . 152,800 Each partner withdraws the maximum allowable amount each year.a. Determine the allocation of income for each of these three years (to the nearest dollar).b. Prepare in appropriate form a statement of partners’ capital for the year ending December 31, 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.
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 $210,000, $180,000, and $90,000, 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 $8 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 $9,100 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 25 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 | 1710 | 1800 | 1880 |
| Stone | 1440 | 1500 | 1620 |
| Lawson | 1300 | 1380 | 1310 |
| Monet | -0- | 1190 | 1580 |
The partnership reports net income for 2016 through 2018 as follows:
2016 . . . . . . . . . . . . . . . $ 65,000
2017 . . . . . . . . . . . . . . . (20,400)
2018 . . . . . . . . . . . . . . . 152,800
Each partner withdraws the maximum allowable amount each year.
a. Determine the allocation of income for each of these three years (to the nearest dollar).
b. Prepare in appropriate form a statement of partners’ capital for the year ending December 31, 2018.
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