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 2016

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 2017

Particulars	Person G	Person S	Person L	Person M	Total
Net income					$   (20,400)
Compensation allowance	$       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)	$             0

Table: (2)

Allocation of income for the year 2018

Particulars	Person G	Person S	Person L	Person M	Total
Net income					$  152,800
Compensation allowance	$       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	$         6,511	$          6,511	$         6,510	$            6,510	$    26,042
Total	$       49,348	$        41,767	$       25,194	$          36,491	$              -

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

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 2017

Particulars	Person G	Person S	Person L	Person M	Total
Beginning balance	$     228,065	$      185,477	$       92,558	$        168,700	$  674,800
Income allocation	$         4,684	$         (2,827)	$     (14,937)	$          (7,320)	$   (20,400)
Drawings	$      (22,806)	$       (18,548)	$       (9,256)	$        (16,870)	$   (67,480)
Ending balances	$     209,943	$      164,102	$       68,365	$        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, 2018.

Particulars	Person G	Person S	Person L	Person M	Total
Beginning balance	$     209,943	$      164,102	$       68,365	$        144,510	$  586,920
Income allocation	$       49,348	$        41,767	$       25,194	$          36,491	$  152,800
Drawings	$      (20,994)	$       (16,410)	$       (6,837)	$        (14,451)	$   (58,692)
Ending balances	$     238,297	$      189,459	$       86,722	$        166,550	$  681,028

Table: (6)