ECONOMICS

(1)

The partnership agreement of Jones, King, and Lane provides for the annual allocation of the business’s profit or loss in the following sequence:

• Jones, the managing partner, receives a bonus equal to 20 percent of the business’s profit.

• Each partner receives 15 percent interest on average capital investment.

• Any residual profit or loss is divided equally.

The average capital investments for 2013 were as follows:

Jones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000

King . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000

Lane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000

How much of the $90,000 partnership profit for 2013 should be assigned to each partner?

(2)

Gray, Stone, and Lawson open an accounting practice on January 1, 2011, 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. Articles of partnership agreement are 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 $8 per billable hour worked by that individual during the year.

(2) 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).

(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 bonus, the salary allowance, and the interest. Also included in the agreement is the provision that the bonus cannot be a negative amount.

(4) 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, 2011. On January 1, 2012, 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:

2011                       2012                       2013

Gray . . . . . . . . . . . . . .      1,710                     1,800                    1,880

Stone . . . . . . . . . . . . .      1,440                      1,500                    1,620

Lawson . . . . . . . . . . .       1,300                    1,380                    1,310

Monet . . . . . . . . . . . .      –0–                       1,190                    1,580

 

The partnership reports net income for 2011 through 2013 as follows:

2011 . . . . . . . . . . . . . . . . . . . . . . $ 65,000

2012 . . . . . . . . . . . . . . . . . . . . . . (20,400)

2013 . . . . . . . . . . . . . . . . . . . . . . 152,800

 

Each partner withdraws the maximum allowable amount each year.

a. Determine the allocation of income for each of these three years (to the nearest dollar).

b. Prepare in appropriate form a statement of partners’ capital for the year ending December 31,

2013.

 

(3)

 

A partnership of attorneys in the St. Louis, Missouri, area has the following balance sheet accounts as of January 1, 2013:

 

Assets . . . . . . . . . . . . . . . .   . $320,000      Liabilities . . . . . . . . . . . . . . . . . $120,000

Athos, capital . . . . . . . . . . . . . 80,000

Porthos, capital . . . . . . . . .. . . 70,000

Aramis, capital . . . . . . . . . . .. . 50,000

 

According to the articles of partnership, Athos is to receive an allocation of 50 percent of all partnership profits and losses while Porthos receives 30 percent and Aramis, 20 percent. The book value of each asset and liability should be considered an accurate representation of fair value.

For each of the following independent situations, prepare the journal entry or entries to be recorded by the partnership. (Round to nearest dollar.)

a. Porthos, with permission of the other partners, decides to sell half of his partnership interest to D’Artagnan for $50,000 in cash. No asset revaluation or goodwill is to be recorded by the partnership.

b. All three of the present partners agree to sell 10 percent of each partnership interest to D’Artagnan for a total cash payment of $25,000. Each partner receives a negotiated portion of this amount. Goodwill is recorded as a result of the transaction.

c. D’Artagnan is allowed to become a partner with a 10 percent ownership interest by contributing $30,000 in cash directly into the business. The bonus method is used to record this admission.

d. Use the same facts as in requirement (c) except that the entrance into the partnership is recorded by the goodwill method.

e. D’Artagnan is allowed to become a partner with a 10 percent ownership interest by contributing $12,222 in cash directly to the business. The goodwill method is used to record this transaction.

f. Aramis decides to retire and leave the partnership. An independent appraisal of the business and its assets indicates a current fair value of $280,000. Goodwill is to be recorded.

Aramis will then be given the exact amount of cash that will close out his capital account.

(4)

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