Chapter 12, Problem 12.3BPR

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 20Y2, indicating the division of the income.

Explanation of Solution

The income statement for 20Y2 of R&X is as follows:

R&X
Income Statement
For the Year Ended December 31, 20Y2
Professional fees		$555,300
Operating expenses:
Salary expense	$384,900
Depreciation expense—building	$12,900
Heating and lighting expense	$10,500
Depreciation expense—office equipment	$6,300
Property tax expense	$3,200
Supplies expense	$3,000
Miscellaneous expense	$2,500
Total operating expenses		$423,300
Net income		$132,000

 Table (1)

Hence, the net income of R&X for the year 20Y2 is $132,000.

Division of net income:

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

	R	X	Total
Salary allowance…………………	$50,000	$65,000	$115,000
Interest allowance……………	15,000 (1)	16,200 (2)	$31,200
Remaining income (loss) (1:1)…………	-$7,100	-$7,100	-$14,200
Net income……………	$57,900	$74,100	$132,000

 Table (2)

Working note for the calculation of Interest allowance of R & X

Interest Allowance is at 12%:

$\begin{array}{c}\begin{array}{l}\text{Interest}\\ \text{Allowance}\text{of}\text{R}\end{array}\}\text{=}\left(\begin{array}{l}\text{Capital}\text{at}\text{beginning}\\ \text{of}\text{the}\text{fiscal}\text{year}\end{array}\right)\text{×}\frac{\text{12}}{\text{100}}\\ \text{=}\text{\$125,000}\text{×}\frac{\text{12}}{\text{100}}\\ \text{=\$15,000}\end{array}$

(1)

$\begin{array}{c}\begin{array}{l}\text{Interest}\\ \text{Allowance}\text{of}\text{X}\end{array}\}\text{=}\left(\begin{array}{l}\text{Capital}\text{at}\text{beginning}\\ \text{of}\text{the}\text{fiscal}\text{year}\end{array}\right)\text{×}\frac{\text{12}}{\text{100}}\\ \text{=}\text{\$135,000}\text{×}\frac{\text{12}}{\text{100}}\\ \text{=\$16,200}\end{array}$

(2)

Note: X invested additional $20000 on May 5, 20Y2, so, it should not be considered for calculating Interest allowance. So X’s Capital at the beginning of the year is $135,000 $\left(\text{\$155,000}\text{-}\text{\$20,000}\right)$.

Hence, R & X partners will get $57,000 and $74,100 respectively from the net income.

2.

To determine

To prepare: The statement of partnership equity for 20Y2.

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 20Y2 is as follows:

R&X
Statement of Partnership Equity
For the Year Ended December 31, 20Y2
	R	X	Total
Balances, January 1, 20Y2	$125,000	$135,000	$260,000
Capital additions		$20,000	$20,000
Net income for the year	$57,900	$74,100	$132,000
Partner withdrawals	-$35,000	-$50,000	-$85,000
Balances, December 31, 20Y2	$147,900	$179,100	$327,000

Table (3)

Hence, the capital accounts of R & X partners show $147,900 and $179,000 respectively at the end of the period.

3.

To determine

To prepare: The balance sheet at the end of 20Y2.

Explanation of Solution

The balance sheet of R & X at the end of 20Y2 is as follows:

R&X
Balance Sheet
December 31, 20Y2
Assets
Current assets:
Cash		$70,300
Accounts receivable		$33,600
Supplies		$5,800
Total current assets			$109,700
Property, plant, and equipment:
Land		$128,000
Building	$175,000
Less accumulated depreciation	$80,000	$95,000
Office equipment	$42,000
Less accumulated depreciation	$25,300	$16,700
Total property, plant, and equip.			$239,700
Total assets			$349,400
Liabilities
Current liabilities:
Accounts payable		$12,400
Salaries payable		$10,000
Total liabilities			$22,400
Partners’ Equity
R, capital		$147,900
X, capital		$179,100
Total partners’ equity			$327,000
Total liabilities and partners’ equity			$349,400

Table (4)

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