Advanced Financial Accounting
Advanced Financial Accounting
12th Edition
ISBN: 9781259916977
Author: Christensen, Theodore E., COTTRELL, David M., Budd, Cassy
Publisher: Mcgraw-hill Education,
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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.

Expert Solution
Check Mark

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

    ENWTotal
    Profit ratio33410
    Ending capital$28,000$40,000$48,000
    Net income$78,960
    Interest on capital 10%2,8004,0004,800(11,600)
    Salaries15,00020,00018,000(53,000)
    Bonus3,760(3,760)
    Residual income$10,600
    Allocation of income 3:3:43,1803,1804,240(10600)
    Total$24,740$27,180$27,0400

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.

Expert Solution
Check Mark

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

    DateDebitCreditBalanceMonths maintainedMonths x balance
    1/1$30,0004$120,000
    5/16,00036,0004144,000
    9/18,00028,0004112,000
    Total12$376,000

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

Average capital for N

    DateDebitCreditBalanceMonths maintainedMonths x balance
    1/1$40,0002$80,000
    3/1$9,00031,0004124,000
    7/1$5,00036,000272,000
    9/14,00040,0004160,000
    Total12$436,000

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

Average capital for W

    DateDebitCreditBalanceMonths maintainedMonths x balance
    1/1$50,0003$150,000
    4/1$7,00057,0002114,000
    6/13,00060,0002120,000
    8/112,00048,0005240,000
    Total12$624,000

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

Income distribution s

    ENWTotal
    Profit sharing ratio1113
    Average capital$31,222$36,333$52,000
    Net income$68,080
    Interest on capital 10%3,1333,6335,200(11,966)
    Salaries24,00021,00025,000(70,000)
    Bonus4,280(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$24,1440

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.

Expert Solution
Check Mark

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

    ENWTotal
    Profit ratio87520
    Beginning capital$30,000$40,000$50,000
    Net income$92,940
    Interest on beginning capital 10%3,0004,0005,000(12,000)
    Salaries21,00018,00015,000(54,000)
    Bonus6,490(6,490)
    Residual income$20,450
    Allocation of income 8:7:58,1807,1585,112(20,450)
    Total$32,180$29,158$31,6020

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

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Scenario B: Partners A, B, and C operate a business with profit sharing agreement ratios of 5: 3:2, and capital balances of $300,000, $200,000, and $100,000 respectively. The total income for the year is $180,000. Each partner receives a fixed salary of $50, 000, and they are entitled to earn 10% interest on their capital balances. Calculate the total income allocated to Partner
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