Chapter 12, Problem 12.3APR

1.

To determine

Partnership

It is that form of organization which is owned and managed by two or more persons who invest and share the profits and losses according to a pre-determined ratio.

To prepare:  An income statement for 2016, indicating the division of the income.

Explanation of Solution

The income statement for 2016 of L&Y is as follows:

L &Y
Income Statement
For the Year Ended December 31, 2016
Professional fees		$395,300
Operating expenses:
Salary expense	$154,500
Depreciation expense—building	$15,700
Property tax expense	$12,000
Heating and lighting expense	$8,500
Supplies expense	$6,000
Depreciation expense—office equipment	$5,000
Miscellaneous expense	$3,600
Total operating expenses		$205,300
Net income		$190,000

Table (1)

Hence, the net income of L&Y for the year 2016 is $190,000.

Division of net income:

The following table shows the division of net income between the partners.

	L	Y	Total
Salary allowance	$45,000	$54,700	$99,700
Interest allowance	$13,500 (1)	$7,800 (2)	$21,300
Remaining income (1:1)	$34,500	$34,500	$69,000
Net income	$93,000	$97,000	$190,000

Table (2)

Working note for the calculation of Interest allowance of L & Y

Interest Allowance is at 10%:

$\begin{array}{c}\begin{array}{l}\text{Interest}\\ \text{Allowance}\text{of}\text{L}\end{array}\}\text{=}\left(\begin{array}{l}\text{Capital}\text{at}\text{beginning}\\ \text{of}\text{the}\text{fiscal}\text{year}\end{array}\right)\text{×}\frac{\text{10}}{\text{100}}\\ \text{=}\text{\$135,000}\text{×}\frac{\text{10}}{\text{100}}\\ \text{=\$13,500}\end{array}$ (1)

$\begin{array}{c}\begin{array}{l}\text{Interest}\\ \text{Allowance}\text{of}\text{Y}\end{array}\}\text{=}\left(\begin{array}{l}\text{Capital}\text{at}\text{beginning}\\ \text{of}\text{the}\text{fiscal}\text{year}\end{array}\right)\text{×}\frac{\text{10}}{\text{100}}\\ \text{=}\text{\$78,000}\text{×}\frac{\text{10}}{\text{100}}\\ \text{=\$7,800}\end{array}$ (2)

Note: Y invested additional $10000 on April 10, 2016 so, it should not be considered for calculating Interest allowance. So Y’s Capital at the beginning of the year is $78,000$\left(\text{\$88,000}\text{-}\text{\$10,000}\right)$.

Hence, L & Y partners will get $93,000 and $97,000 respectively from the net income.

2.

To determine

To prepare: The statement of partnership equity for 2016.

Explanation of Solution

Statement of partnership equity:

The statement of partnership equity contains the changes in the partners’ capital account over a period of time. The changes in capital accounts of partners may occur due to the addition of the capital, net income or withdrawals.

The statement of partnership equity for 2016 is as follows:

L &Y
Statement of Partnership Equity
For the Year Ended December 31, 2016
	L	Y	Total
Balances, January 1, 2016	$135,000	$78,000	$213,000
Capital additions		10,000	10,000
Net income for the year	93,000	97,000	190,000
Partner withdrawals	($50,000)	($60,000)	($110,000)
Balances, December 31, 2016	$178,000	$125,000	$303,000

Table (3)

Hence, the capital accounts of L & Y partners show $178,000 and $125,000 respectively at the end of the period.

3.

To determine

To prepare: The balance sheet at the end of 2016.

Explanation of Solution

The balance sheet of L&Y at the end of 2016 is as follows:

L&Y
Balance Sheet
December 31, 2016
Assets
Current assets:
Cash		$34,000
Accounts receivable		$47,800
Supplies		$2,000
Total current assets			$83,800
Property, plant, and equipment:
Land		$120,000
Building	$157,500
Less accumulated depreciation	$67,200	$90,300
Office equipment	$63,600
Less accumulated depreciation	$21,700	$41,900
Total property, plant, and equip.			$252,200
Total assets			$336,000
Liabilities
Current liabilities:
Accounts payable		$27,900
Salaries payable		$5,100
Total liabilities			$33,000
Partners’ Equity
L, capital		$178,000
Y, capital		$125,000
Total partners’ equity			$303,000
Total liabilities and partners’ equity			$336,000

Table (4)

Hence, the assets total matches with total liabilities and partners’ equity in the balance sheet, on the date of formation of partnership.