Gray, Stone, and Lawson open an accounting practice on January 1, 2016, in San D
ID: 2619526 • Letter: G
Question
Gray, Stone, and Lawson open an accounting practice on January 1, 2016, 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 $310,000, $280,000, and $140,000, 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 1. A salary allowance is credited to each partner in an amount equal to $9 per billable hour worked by that individual during the year. (computed without regard for current income or drawings) bonus, the salary allowance, and the interest. Also included in the agreement is the provision that there will be no bonus if 2. Interest is credited to the partners' capital accounts at the rate of 12 percent of the average monthly balance for the year 3. An annual bonus is to be credited to Gray and Stone. Each bonus is to be 10 percent of net income after subtracting the there is a net loss or if salary and interest result in a negative remainder of net income to be distributed 4. Any remaining partnership profit or loss is to be divided evenly among all partners Because of financial shortfalls encountered in getting the business started, Gray invests an additional $10,000 on May 1, 2016 On January 1, 2017, the partners allow Monet to buy into the partnership. Monet contributes cash directly to the business in an amount equal to a 20 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 applicableExplanation / Answer
a. Income Allocation—2016 Gray Stone Lawson Total Hours 1810 1540 2300 Salary allowance ($9 per billable hour) $16,290 $13,860 $20,700 $50,850 Interest (working Note A) $38,000 $33,600 $16,800 $88,400 Bonus (not applicable salary and interest would have negative balance $0 $0 $0 $0 Remaining loss (split evenly):($86,000 - ($50,850+$88,400) -$17,750 -$17,750 -$17,750 -$53,250 Profit allocation $36,540 $29,710 $19,750 $86,000 Working Note A: Interest Gray Stone Lawson Beginning Capital $310,000 $280,000 $140,000 Interest 12% ; Gray = ($310,000 x 12% x 4/12)+($310,00+9,100 )x12% x 8/12) $38,000 $33,600 $16,800 Capital Account Balances—1/1/16 – 12/31/16 Gray Stone Lawson Total Beginning contributions $310,000 $280,000 $140,000 $730,000 Added Investment $10,000 $0 $0 $10,000 Profit allocation (from above) $36,540 $29,710 $19,750 $86,000 Drawing (10% of beginning balances) -$31,000 -$28,000 -$14,000 -$73,000 Ending balances $325,540 $281,710 $145,750 $753,000 Income Allocation—2017 Gray Stone Lawson Monet Total Hours 2800 1500 1480 1290 Salary allowance ($9 per billable hour) $25,200 $13,500 $13,320 $11,610 $63,630 Interest (12% x Ending Bal of 2016) $39,064.8 $33,805.2 $17,490 $30,120 $120,480 Bonus (not applicable salary and interest would have negative balance $0 $0 $0 $0 $0 Remaining loss (split evenly):(-$30,400 - ($63630+$120,480) -$53,627.5 -$53,627.5 -$53,627.5 -$53,627.5 -$214,510 Profit allocation $10,637.3 -$6,322.3 -$22,817.5 -$11,897.5 -$30,400 Working Note B: Monet Capital Monet's Investment = 25% ($753,000 + Monet's Investment) .75 Monet's Investment = $188,250 Monet's Investment $251,000 Capital Account Balances—1/1/17 – 12/31/17 Gray Stone Lawson Monet Total Beginning contributions $325,540 $281,710 $145,750 $251,000 $1,004,000 Profit allocation (from above) $10,637.3 -$6,322.3 -$22,817.5 -$11,897.5 -$30,400 Drawing (10% of beginning balances) -$32,554 -$28,171 -$14,575 -$25,100 -$100,400 Ending balances $303,623.3 $247,216.7 $108,357.5 $214,002.5 $873,200 Income Allocation—2018 Gray Stone Lawson Monet Total Hours 1980 1720 1410 1680 Salary allowance ($9 per billable hour) $17,820 $15,480 $12,690 $15,120 $61,110 Interest (12% x Ending Bal of 2017) $36,434.8 $29,666 $13,002.9 $25,680.3 $104,784 Bonus (not applicable salary and interest would have negative balance $3,075.5 $3,075.5 $0 $0 $6,151 Remaining loss (split evenly):($202,800 - ($61,110 + 104,784) $7,688.75 $7,688.75 $7,688.75 $7,688.75 $30,755 Profit allocation $65,019.05 $55,910.25 $33,381.65 $48,489.05 $202,800 Working Note C: Bonus = Grey and stone 10% each ; Total bonus = 20% Bonus = 20% (Net income – Salary – Interest – Bonus) Bonus = .20 ($202,800 – $61,110 – $104,784 – Bonus) Bonus $6,151 Bonus per person = $2182.33/2 $3,075.5 Capital Account Balances—1/1/18 – 12/31/18 Gray Stone Lawson Monet Total Beginning contributions $303,623.3 $247,216.7 $108,357.5 $214,002.5 $873,200 Profit allocation (from above) $65,019.05 $55,910.25 $33,381.65 $48,489.05 $202,800 Drawing (10% of beginning balances) -$30,362.33 -$24,721.67 -$10,835.75 -$21,400.25 -$87,320 Ending balances $338,280.02 $278,405.28 $130,903.4 $241,091.3 $988,680 b) GRAY, STONE, AND LAWSON Statement of Partners' Capital For Year Ending December 31, 2018 Gray Stone Lawson Monet Total Beginning contributions $303,623.3 $247,216.7 $108,357.5 $214,002.5 $873,200 Profit allocation (from above) $65,019.05 $55,910.25 $33,381.65 $48,489.05 $202,800 Drawing (10% of beginning balances) -$30,362.33 -$24,721.67 -$10,835.75 -$21,400.25 -$87,320 Ending balances $338,280.02 $278,405.28 $130,903.4 $241,091.3 $988,680
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