Gray, Stone, and Lawson open an accounting practice on January 1, 2013, in San D
ID: 2518445 • Letter: G
Question
Gray, Stone, and Lawson open an accounting practice on January 1, 2013, in San Diego, California, to be operated as a partnership. Gray and Stone will serve as the senior partners because of their years of experience. To establish the business, Gray, Stone, and Lawson contribute cash and other properties valued at $210,000, $180,000, and $90,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations:
Personal drawings are allowed annually up to an amount equal to 10 percent of the beginning capital balance for the year.
Profits and losses are allocated according to the following plan:
A salary allowance is credited to each partner in an amount equal to $8 per billable hour worked by that individual during the year.
Interest is credited to the partners’ capital accounts at the rate of 12 percent of the average monthly balance for the year (computed without regard for current income or drawings).
An annual bonus is to be credited to Gray and Stone. Each bonus is to be 10 percent of net income after subtracting the bonus, the salary allowance, and the interest. Also included in the agreement is the provision that the bonus cannot be a negative amount.
Any remaining partnership profit or loss is to be divided evenly among all partners.
Because of monetary problems encountered in getting the business started, Gray invests an additional $9,100 on May 1, 2013. On January 1, 2014, the partners allow Monet to buy into the partnership. Monet contributes cash directly to the business in an amount equal to a 25 percent interest in the book value of the partnership property subsequent to this contribution. The partnership agreement as to splitting profits and losses is not altered upon Monet’s entrance into the firm; the general provisions continue to be applicable.
The billable hours for the partners during the first three years of operation follow:
The partnership reports net income for 2013 through 2015 as follows:
Each partner withdraws the maximum allowable amount each year.
Determine the allocation of income for each of these three years.
$0
$0
$0
Prepare in appropriate form a statement of partners' capital for the year ending December 31, 2015. (Amounts to be deducted should be indicated with minus sign. Round your answers to nearest dollar amounts.)
Capital Account Balances 1/1/15 – 12/31/15
Gray, Stone, and Lawson open an accounting practice on January 1, 2013, in San Diego, California, to be operated as a partnership. Gray and Stone will serve as the senior partners because of their years of experience. To establish the business, Gray, Stone, and Lawson contribute cash and other properties valued at $210,000, $180,000, and $90,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations:
Explanation / Answer
Ans
First given below schedule of income allocation 2013
Income Allocation—2013
Gray
Stone
Lawson
Totals
salary allowance ($ 8 per billable allowance)
13680
11520
10400
35600
interest ( refer note 1)
25928
21600
10800
58328
bonus (refer note 2)
0
0
0
0
loss distributed evenly
-9643
-9643
-9642
-28928
Profit allocation
29965
23477
11558
65000
Working Note 1 calculation
interest calculation
for the year 2013
date
particulars
Gray
Stone
Lawson
1/1/2013
opening capital
210000
180000
90000
interest @ 12% for 4 months
8400
1 may ,2013
capital invested
9100
total capital
219100
interest @ 12% for 8 months
17528
interest @12% for 12 months
21600
10800
Total interest
25928
21600
10800
Working note 2 calculation
calculation of bonus for the year 2013
particulars
amount($)
net income
65000
less
salary allowance
-35600
interest
-58328
profit/(loss) if loss no bonus
-28928
b)
we will make the statement capital account for the year 2013
GRAY, STONE, LAWSON
Statement of Partners' Capital
For the Year Ending December 31, 2013
particulars
Gray
Stone
Lawson
Totals
Beginning contributions
210000
180000
90000
480000
added investment
9100
9100
Profit allocation(refer income statement)
29965
23477
11558
65000
Drawings ( 10% of the beginning balances)
-21000
-18000
-9000
-48000
Closing balance
228065
185477
92558
506100
Given in the problem Monet contributes cash directly to the business in an amount equal to a 25 percent interest in the book value of the partnership property subsequent to this contribution
This is calculated below Monet investment
Monet's Investment = 25% ($506,100 + Monet's Investment)
Ml = $126,525 + .25 Ml
.75 Ml = $126,525
Ml = $168,700
First given below schedule of income allocation 2014
Income Allocation—2014
Gray
Stone
Lawson
Monet
Totals
salary allowance ($ 8 per billable allowance)
14400
12000
11040
9520
46960
interest ( refer note 3)
27368
22257
11107
20244
80976
bonus (refer note 4)
0
0
0
0
loss distributed evenly
-37084
-37084
-37084
-37084
-148336
Profit /loss allocation
4684
-2827
-14937
-7320
-20400
Working note 3
interest calculation
for the year 2014
date
particulars
Gray
Stone
Lawson
Monet
1/1/2014
opening capital
228065
185477
92558
168700
interest @12% for 12 months
27368
22257
11107
20244
Working note 4
calculation of bonus for the year 2014
particulars
amount($)
net income
-20400
less
salary allowance
-46960
interest
-80976
profit/(loss) if loss no bonus
-148336
we will make the statement capital account for the year 2014
GRAY, STONE, LAWSON and Monet
Statement of Partners' Capital
For the Year Ending December 31, 2014
particulars
Gray
Stone
Lawson
Monet
Totals
Beginning contributions
228065
185477
92558
168700
674800
Profit /loss allocation(refer income statement)
4684
-2827
-14937
-7320
-20400
Drawings ( 10% of the beginning balances)
-22807
-18548
-9256
-16870
-67480
Closing balance
209942
164103
68365
144510
586920
C )
First given below schedule of income allocation 2015
Income Allocation—2015
Gray
Stone
Lawson
Monet
Totals
salary allowance ($ 8 per billable allowance)
15040
12960
10480
12640
51120
interest ( refer note 7)
25193
19692
8204
17341
70430
bonus (refer note 8)
2604
2604
0
5208
profit distributed evenly
6510
6510
6511
6511
26042
Profit allocation
49347
41766
25195
36492
152800
Working note for interest
interest calculation
for the year 2015
date
particulars
Gray
Stone
Lawson
Monet
1/1/2015
opening capital
209942
164103
68365
144510
interest @12% for 12 months
25193
19692
8204
17341
Working note for bonus calculation
calculation of bonus for the year 2015
particulars
amount($)
net income
152800
less
salary allowance
-51120
interest
-70430
profit/(loss) if loss no bonus
31250
less
Bonus (calculation given below)
5208
profit after bonus
26042
The bonus to Gray and Stone is entitled to 10% of net income as defined, the total bonus is 20% and can be computed as follows:
Bonus = 20% (Net income – Salary – Interest – Bonus)
B = .2 ($152,800 – $51,120 – $70,430 – B)
B = .2 ($31,250 – B)
B = $6,250 – .2B
1.2 B = $6,250
B = $5,208 (or $2,604 per person)
D)
we will make the statement capital account for the year 2015
GRAY, STONE, LAWSON and monet
Statement of Partners' Capital
For the Year Ending December 31, 2015
particulars
Gray
Stone
Lawson
Monet
Totals
Beginning contributions
209942
164103
68365
144510
586920
Profit /loss allocation(refer income statement)
49347
41766
25195
36492
152800
Drawings ( 10% of the beginning balances)
-20994
-16410
-6837
-14451
-58692
Closing balance
238295
189459
86723
166551
681028
Income Allocation—2013
Gray
Stone
Lawson
Totals
salary allowance ($ 8 per billable allowance)
13680
11520
10400
35600
interest ( refer note 1)
25928
21600
10800
58328
bonus (refer note 2)
0
0
0
0
loss distributed evenly
-9643
-9643
-9642
-28928
Profit allocation
29965
23477
11558
65000
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