Chapter 14, Problem 29P

a.

To determine

Determine the allocation of income for each of the three years.

Explanation of Solution

Allocation of income for the year 2013:

Particulars	Person G	Person S	Person L	Total
Net income				$          65,000
Compensation allowance	$       13,680	$        11,520	$       10,400	$          35,600
Net profit after allowance				$          29,400
Interest on capital	$       25,928	$        21,600	$       10,800	$          58,328
Net income after interest				$        (28,928)
Distribution among partners	$        (9,643)	$         (9,643)	$       (9,642)	$          28,928
Total	$       29,965	$        23,477	$       11,558	$                   -

Table: (1)

Allocation of income for the year 2014:

Particulars	Person G	Person S	Person L	Person M	Total
Net income					($ 20,400)
Compensation	$ 14,400	$ 12,000	$ 11,040	$ 9,520	$ 46,960
Net profit after allowance					($ 67,360)
Interest on capital	$ 27,368	$ 22,257	$ 11,107	$ 20,244	$ 80,976
Net income after interest					($ 148,336)
Distribution among partners	($ 37,084)	($ 37,084)	($ 37,084)	($ 37,084)	$ 148,336
Total	$ 4,684	($ 2,827)	($ 14,937)	($ 7,320)

Table: (2)

Allocation of income for the year 2015

Particulars	Person G	Person S	Person L	Person M	Total
Net income					$ 152,800
Compensation	$ 15,040	$ 12,960	$ 10,480	$ 12,640	$ 51,120
Net profit after allowance					$ 101,680
Interest on capital	$ 25,193	$ 19,692	$ 8,204	$ 17,341	$ 70,430
Net income after interest					$ 31,250
Bonus	$ 2,604	$ 2,604			$ 5,208
Net income after bonus					$ 26,042
Distribution among partners	$ 6,510	$ 6,510	$ 6,510	$ 6,510	$ 26,042
Total	$ 49,348	$ 41,767	$ 25,194	$ 36,492	$ 0

Table: (3)

Working note

Calculate person G’s monthly capital balance

$\begin{array}{c}\text{Person}\text{G's}\text{capital}\text{for}\text{Jan}\text{to}\text{Apr}=\$210,000\times 4\\ =\$840,000\\ \text{Person}\text{G's}\text{capital}\text{for}\text{May}\text{to}\text{Dec}=\$219,100\times 8\\ =\$1,752,800\end{array}$

Now, calculate the monthly capital for person G

$\begin{array}{c}\text{Total}\text{capital}\text{of}\text{person}\text{G}=\$840,000+\$1,752,800\\ =\$2,592,800\\ \text{Monthly}\text{capital}=\frac{\$2,592,800}{12}\\ =\$216,067\end{array}$

Calculate interest on capital to person G

$\begin{array}{c}\text{Interest}\text{on}\text{capital}=\$216,067\times 12\%\\ =\$25,928\end{array}$

Calculate ending capital balances of partners 2013;

Particulars	Person G	Person S	Person L	Total
Beginning balance	$     210,000	$      180,000	$       90,000	$        480,000
Additional investment	$         9,100			$            9,100
Income allocation	$       29,965	$        23,477	$       11,558	$          65,000
Drawings	$      (21,000)	$       (18,000)	$       (9,000)	$        (48,000)
Ending balances	$     228,065	$      185,477	$       92,558	$        506,100

Table: (4)

Calculate capital of person M:

$\begin{array}{c}\text{M's}\text{investment}=25\%\times \left(\$506,100+\text{M's}\text{investment}\right)\\ \text{M's}\text{investment}=126,525+0.25\text{M's}\text{investment}\\ \text{M's}\text{investment}-0.25\text{M's}\text{investment}=\$126,525\\ 0.75\text{M's}\text{investment}=\$126,525\end{array}$

Now, capital of person M:

$\begin{array}{c}\text{M's}\text{investment}=\frac{\$126,525}{0.75}\\ =\$168,700\end{array}$

Calculate ending capital balances of partners for 2014

Particulars	Person G	Person S	Person L	Person M	Total
Beginning Capital	$ 228,065	$ 185,477	$ 92,557	$ 168,700	$ 674,800
Income Allocation	$ 4,684	($ 2,827)	($ 14,937)	($ 7,320)	($ 20,400)
Drawings	($ 22,807)	($ 18,548)	($ 9,256)	($ 16,870)	($ 67,480)
Ending Balances	$ 209,943	$ 164,103	$ 68,364	$ 144,510	$ 586,920

Table: (5)

Calculate the amount of bonus:

$\begin{array}{c}2\left[\left(\$31,250-x\right)\times 10\%\right]=x\\ \left(\$62,500-2x\right)\times 10\%=x\\ \$6,250-\frac{x}{5}=x\\ \frac{\$31,250-x}{5}=x\end{array}$

Now, bonus is:

$\begin{array}{c}\$31,250-x=5x\\ \$31,250=6x\\ x=\frac{\$31,250}{6}\\ x=\$5,208\end{array}$

Bonus is divided among the two partners equally

Calculate bonus share of partners:

$\begin{array}{c}\text{Bonus}\text{to}\text{partners}=\frac{\$5,208}{2}\\ =\$2,604\end{array}$

b.

To determine

Prepare a statement of partners’ capital for the year ending December 31, 2018.

Explanation of Solution

Statement of partners’ capital for the year ending December 31, 2015:

Particulars	Person G	Person S	Person L	Person M	Total
Beginning Capital	$ 209,943	$ 164,103	$ 68,364	$ 144,510	$ 586,920
Income Allocation	$ 49,348	$ 41,767	$ 25,194	$ 36,492	$ 152,800
Drawings	($ 20,994)	($ 16,410)	($ 6,836)	($ 14,451)	($ 58,692)
Ending Balances	$ 238,296	$ 189,459	$ 86,722	$ 166,551	$ 681,028

Table: (6)