Chapter 15, Problem 15.12P

To determine

Allocation of profit and loss to partners:Allocation of profit and loss to partners will be in accordance with partnership agreement. If the entity does not have formal partnership agreement, section 401 of the UPA 1997 indicates that profit and losses are distributed equally among partners. Profit distributions are not included in the partnership’s income statement, but recorded directly into partner’s capital accounts, not treated as expense items.

The preparation of income distribution schedule using the given information.

Answer to Problem 15.12P

E is entitled to get $24,740, N $27,180 and W will get $27,040 of total profit.

Explanation of Solution

	E	N	W	Total
Profit ratio	3	3	4	10
Ending capital	$28,000	$40,000	$48,000
Net income				$78,960
Interest on capital 10%	2,800	4,000	4,800	(11,600)
Salaries	15,000	20,000	18,000	(53,000)
Bonus	3,760			(3,760)
Residual income				$10,600
Allocation of income 3:3:4	3,180	3,180	4,240	(10600)
Total	$24,740	$27,180	$27,040	0

Bonus =  .05(Net income − bonus)

Bonus =  .05(78,960 − bonus)

20B =  $78,960 − B

21B =  $78,960

B = $78,960/21  =   $3,760

To determine

Allocation of profit and loss to partners: Allocation of profit and loss to partners will be in accordance with partnership agreement. If the entity does not have formal partnership agreement, section 401 of the UPA 1997 indicates that profit and losses are distributed equally among partners. Profit distributions are not included in the partnership’s income statement, but recorded directly into partner’s capital accounts, not treated as expense items.

The preparation of income distribution schedule where interest on capital is calculated using weighted average capital balances.

Answer to Problem 15.12P

Income received by each partner as per income distribution schedule is

E = $21,078

N = $22,858

W = $24,144

Explanation of Solution

Determination of average capital

Average capital for E

Date	Debit	Credit	Balance	Months maintained	Months x balance
1/1			$30,000	4	$120,000
5/1		6,000	36,000	4	144,000
9/1	8,000		28,000	4	112,000
Total				12	$376,000

Average capital $376,000 / 12 months  = $31,333

Average capital for N

Date	Debit	Credit	Balance	Months maintained	Months x balance
1/1			$40,000	2	$80,000
3/1	$9,000		31,000	4	124,000
7/1		$5,000	36,000	2	72,000
9/1		4,000	40,000	4	160,000
Total				12	$436,000

Average capital $436,000 / 12 months  $36,333

Average capital for W

Date	Debit	Credit	Balance	Months maintained	Months x balance
1/1			$50,000	3	$150,000
4/1		$7,000	57,000	2	114,000
6/1		3,000	60,000	2	120,000
8/1	12,000		48,000	5	240,000
Total				12	$624,000

Average capital $624,000 / 12 months  $52,000

Income distribution s

	E	N	W	Total
Profit sharing ratio	1	1	1	3
Average capital	$31,222	$36,333	$52,000
Net income				$68,080
Interest on capital 10%	3,133	3,633	5,200	(11,966)
Salaries	24,000	21,000	25,000	(70,000)
Bonus		4,280		(4,280)
Residual deficit				($18,166)
Allocation of deficit 1:1:1	(6,055)	(6,055)	(6,056)	18,166
Total	$21,078	$22,858	$24,144	0

Bonus =  .10(net income − bonus − N’s salary)

B =  .10(68,080 − B - $21,000)

B =  .10(47.080 − B)

10B =  $47,080 − B

11B =  $47,080

B =   $47,080 / 11 = $4,280

To determine

Allocation of profit and loss to partners: Allocation of profit and loss to partners will be in accordance with partnership agreement. If the entity does not have formal partnership agreement, section 401 of the UPA 1997 indicates that profit and losses are distributed equally among partners. Profit distributions are not included in the partnership’s income statement, but recorded directly into partner’s capital accounts, not treated as expense items.

The preparation of income distribution schedule using the given information.

Answer to Problem 15.12P

E is entitled to get $32,180, N $29,158 and W will get $31,602 of total profit.

Explanation of Solution

	E	N	W	Total
Profit ratio	8	7	5	20
Beginning capital	$30,000	$40,000	$50,000
Net income				$92,940
Interest on beginning capital 10%	3,000	4,000	5,000	(12,000)
Salaries	21,000	18,000	15,000	(54,000)
Bonus			6,490	(6,490)
Residual income				$20,450
Allocation of income 8:7:5	8,180	7,158	5,112	(20,450)
Total	$32,180	$29,158	$31,602	0

Bonus =   .20(Net income − Bonus − Salaries)

B =  .20(92,940 − B - $54,000)

5B =  .20($38,940 − B

6B =  $38,940

B =  $38,940 / 6 = $6,490