Chapter 15, Problem 15.18P

To determine

Partnership: The partnership is a popular form of business because it is easy to form and allows several individuals to combine their talents, skills and resources in a particular business. In addition partnerships allow the sharing of risks for rapidly growing business.

From accounting point of view partnership requires recognition of several important factors,

1. From accounting point of view partnership is a separate business entity.
2. The partnership accounts for their operations using accrual accounting.
3. Most partnerships are not required to furnish financial statements annually and they are not required to have annual audit of their financial statements.

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.

Requirement 1

The preparation of a classified balance sheet as of January 2, 20X3 for H and S partnership, based on given information.

Answer to Problem 15.18P

Total assets and liabilities, equity for year 20X3 is $744,500

Explanation of Solution

H and S partnership

Balance sheet

As at January 2, 20X3

	Amount $	Amount $
Assets
Current assets:
Cash		55,000
Temporary investment		81,500
Trade accounts receivable	70,000
Less: allowance for uncollectible	(4,500)	65,500
Note receivable		50,000
Inventories		62,500
Total current assets		314,500
Non-current assets:
Property plant and equipment:
Buildings	600,000
Less Accumulated depreciation	(230,000)	370,000
Intangible Assets:
Customer lists		60,000
Total Assets		744,500
Liabilities and Partnership capital:
Current liabilities:
Current proportion of mortgage payable		25,000
Long- term liabilities:
Mortgage payable		150,000
Partnership capital
H’s capital	327,000
S capital	242,500	569,500
Total Liabilities and Capital		744,500

II.a

To determine

Partnership: The partnership is a popular form of business because it is easy to form and allows several individuals to combine their talents, skills and resources in a particular business. In addition partnerships allow the sharing of risks for rapidly growing business.

From accounting point of view partnership requires recognition of several important factors,

1. From accounting point of view partnership is a separate business entity.
2. The partnership accounts for their operations using accrual accounting.
3. Most partnerships are not required to furnish financial statements annually and they are not required to have annual audit of their financial statements.

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.

Requirement 2

The preparation of income statement for H and S for the year ended December 20X3.

Answer to Problem 15.18P

Net income for the year ended December 31, 20X3 $260,000

Explanation of Solution

	Amount $
Revenue	650,000
Less cost of goods sold	(320,000)
Gross profit	330,000
Operating expenses:
Selling, general and Administrative expenses	(70,000)
Net income	260,000

II.b

To determine

Partnership: The partnership is a popular form of business because it is easy to form and allows several individuals to combine their talents, skills and resources in a particular business. In addition partnerships allow the sharing of risks for rapidly growing business.

From accounting point of view partnership requires recognition of several important factors,

1. From accounting point of view partnership is a separate business entity.
2. The partnership accounts for their operations using accrual accounting.
3. Most partnerships are not required to furnish financial statements annually and they are not required to have annual audit of their financial statements.

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.

Requirement 3

The preparation of income distribution schedule for 20X3.

Answer to Problem 15.18P

His entitled to get $130,800 and S will get $129,200 of total profit.

Explanation of Solution

	H	S	Total
Percentage of profit	20%	80%	100%
Net income			260,000
10% bonus to H $260,000 x .10	26,000		(26,000)
Salaries to partners	90,000	70,000	(160,000)
Residual income			74,000
Allocation 20%: 80%	14,800	59,200	(74,000)
Total	130,800	129,200	0

II.c

To determine

Partnership: The partnership is a popular form of business because it is easy to form and allows several individuals to combine their talents, skills and resources in a particular business. In addition partnerships allow the sharing of risks for rapidly growing business.

From accounting point of view partnership requires recognition of several important factors,

1. From accounting point of view partnership is a separate business entity.
2. The partnership accounts for their operations using accrual accounting.
3. Most partnerships are not required to furnish financial statements annually and they are not required to have annual audit of their financial statements.

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.

Requirement 3

The capital balance of each partner to be appeared in balance sheet dated December 31, 20X3.

Answer to Problem 15.18P

H’s capital balance $447,800 and S capital balance $366,700

Explanation of Solution

	H	S	Total
Capital balance January 20X3	327,000	242,500	569,500
Add net income 20X3	130,800	129,200	260,000
Less withdrawals during the year	(10,000)	(5,000)	(15,000)
Capital balance December 31, 20X3	447,800	366,700	814,500

II.d

To determine

Partnership: The partnership is a popular form of business because it is easy to form and allows several individuals to combine their talents, skills and resources in a particular business. In addition partnerships allow the sharing of risks for rapidly growing business.

From accounting point of view partnership requires recognition of several important factors,

1. From accounting point of view partnership is a separate business entity.
2. The partnership accounts for their operations using accrual accounting.
3. Most partnerships are not required to furnish financial statements annually and they are not required to have annual audit of their financial statements.

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.

Requirement 4

The partnership net income received by each partner would be same under given situation

Answer to Problem 15.18P

When the net income is $263,636 the income received by each partner will be $131,818

Explanation of Solution

To illustrate, assume that partnership net income is increased by $1,000

	H	S	Total
Percentage of profit	20%	80%	100%
Net income			261,000
10% bonus to H $260,000 x .10	26,100		(26,100)
Salaries to partners	90,000	70,000	(160,000)
Residual income			74,900
Allocation 20%: 80%	14,980	59,920	(74,900)
Total	131,080	129,920	0

The increase of $1,000 in net income resulted increase in H’s share by $280 (131,080 -130,800) and S’s share by $720 (129,920 -129,200) that means S share increased by $440 then H’s share ($720 - $280) or S receives 44% more than H in $1,000.

At the partnership income $260,000, H received $1,600 more net income than S (130,800 − 129,200)

When difference between these two incomes is divided by 44% we will get net required increase in net income where both the partners receive same share on income

Hence net increase in income required is $1,600 / .44 = $3,636

	H	S	Total
Percentage of profit	20%	80%	100%
Net income after increase of $3,636			263,636
10% bonus to H $260,000 x .10	26,363.6		(26,363.6)
Salaries to partners	90,000	70,000	(160,000)
Residual income			77,272.4
Allocation 20%: 80%	15,454.5	61,878	(77,272.4)
Total	131,818	131,818	0