16

E 16-19~utnl8fship incomeallocation-Salary allowance and interestThe partnership agreement of Kray, Lam, and Mann provides for the division of net income as follows:

1. Lam, who manages the partnership, is to receive a salary of $11 ,000 per year.2. Each partner is to be allowed interest at 10% on beginning capital.3. Remaining profits are to be divided equally.

During 2011, Kray invested an additional $4,000 in the partnership. Lam withdrew $5,000, and Mann withdrew$4,000. No other investments or withdrawals were made during 2011. On January 1, 2011, the capital balances wereKray,$65,000; Lam, $75,000; and Mann, $70,000. Total capital at year end was $252,000.

R EQUI RED: Prepare a statement of partners' capital for the year ended December 31, 20 11.

SRecor 9 new partner InvestmentAfter operating as partners for several years, Gro and Ham decided to sell one-half of each of their partnership intereststo lot for a total of $70,000, paid directly to Gro and Ham.

At the time of lot's admittance to the partnership, Gro and Ham had capital balances of $45,000 and $65,000,respectively, and shared profits 45 percent to Gro and 55 percent to Ham.

REQUIRED1. Calculate the capital balances of each of the partners immediately after lot is admitted as a partner assum-

ing that the assets are not revalued, and prepare a second calculation of the capital balances assuming thatthe assets are revalued at the time lot is admitted.

2. In designing a new partnership agreement, how should profits and losses be divided?

3. If a new partnership agreement is not established, how will profits and losses be divided?

E 16-21Partnershipretirement-Various situationsThe Cas, Don, and Ear partnership balance sheet and profit and loss percentages at June 30, 2011, are summarizedas follows:

$500,000 Cas capital (30%)Don capital (30%)Ear capital (40%)

$140,000175,000185,000

$500,000

Assets

$500,000

On July 1, 2011, the partners agree that Cas is to retire immediately and receive $161,000 for her partnershipinterest.

REQUI RED: Prepare journal entries to illustrate three possible methods of accounting for the retirement of Cas.

• • I

P 16-1Partnership income allocation-Statement of partnership capitalEllen, Fargo, and Gary are partners who share profits and losses 20 percent, 20 percent, and60 percent, respectively, after Ellen and Fargo each receive a $12,000 salary allowance. Capitalbalances on January 1,2011, are as follows:

Ellen (20%)Fargo (20%)Gary (60%)

$ 69,00085,500

245,500

During 2011, Gary invested an additional $20,000 in the partnership, and Ellen and Fargoeach withdrew $12,000, equal to their salary allowances as provided by the profit and loss sharingagreement. The partnership net assets at December 31,2011, were $481,000.

R E QUI RED: Preparea sl

P 16-2Recording new partThe partnership of Martiand fair value and thepr

CashAccounts reoInventoriesPlant assets-

Accounts palMortin capitiOscar capital

Martin and Oscar agree$95,000 cash and a builda fair value of $120,000.

REQUIRED1. Prepare a balance shee

admission of Trent,as

2. Prepare a balance sheesion of Trent, assuming

P 16-3Partnership incomeAshe and Barbour areprespectively. The partueion beginning capital bailpercent bonus of partneqing income is dividede~

R E QUI RED: Prepare anfor 2011 should be divided.

P 16-4Pa IplncomeThe partnership agreemfollows:

1. Alex is to receivea s

2. Partners are to receicomputing these aver

3. Remaining profitsar

Alex had a capitalb.1, 20 I 1. Carl's capital b$30,000 on September I$10,000 on July 1but in

The partnership hasthe net loss as follows:$

as follows:

5,000, and Mann withdrew1, the capital balances were

r 31,2011.

f their partnership interests

of $45,000 and $65,000,

itted as a partner assum-1balances assuming that

divided?

0, 2011, are summarized

1,000 for her partnership

or the retirement of Cas.

nt, 20 percent, andallowance. Capital

nd Ellen and Fargoofit and loss sharing

Partnerships-Formation, Operations, and Changes in Ownership Intere s

REQUIRE D: Prepare a statement of partnership capital for the year ended December 31, 2011.

P16·2Recordingnew partner investment-Revaluation and nonrevaluation casesThepartnershipof Mortin and Oscar is being dissolved, and the assets and equities at book valueandfairvalue and the profit and loss sharing ratios at January 1, 2011, are as follows:

Book Value Fair Value

CashAccounts receivable-netInventoriesPlant assets-net

$ 20,000100,00050,000100,000

$270,000

$ 50,000120,000100,000

$270,000

$ 20,000100,000200,000120,000

$440,000

$ 50,000Accounts payableMortin capital (50%)Oscar capital (50%)

~jortinand Oscar agree to admit Trent into the partnership for a one-third interest. Trent invests95,000cash and a building to be used in the business with a book value to Trent of $100,000 andafairvalueof $120,000.

REQUIRED1.Preparea balance sheet for the Mortin, Oscar, and Trent partnership on January 2, 2011, just after theadmissionof Trent, assuming that the assets are revalued and goodwill is recognized.

2.Preparea balance sheet for the Mortin, Oscar, and Trent partnership on January 2, 20 II, after the admis-sionofTrent, assuming that the assets are not revalued.

P16·3Partnershipincome allocationAsheandBarbour are partners with capital balances on January 1,2011, of $40,000 and $50,000,respectively.The partnership agreement provides that each partner is allowed 10 percent interestonbeginningcapital balances; that Ashe receives a salary allowance of $12,000 per year and a 20percentbonus of partnership income after interest, salary allowance, and bonus; and that remain-ingincomeis divided equally.

REQU IRE D: Prepare an income distribution schedule to show how the $105,000 partnership net incomefor201I shouldbe divided.

P16.4~Mnerslli'p Income allocatlon-Complex, net lossThepartnership agreement of Alex, Carl, and Erika provides that profits are to be divided asfollows:

1.Alexis to receive a salary allowance of $10,000 for managing the partnership business.

2.Partners are to receive 10% interest on average capital balances. Drawings are excluded fromcomputing these averages.

3.Remaining profits are to be divided 30%, 30%, and 40% to Alex, Carl, and Erika, respectively.

Alex had a capital balance of $60,000 at January 1,2011, and had drawings of $8,000 on July1,2011.Carl's capital balance on January 1,2011, was $90,000, and he invested an additional$30,000on September 1,2011. Erika's beginning capital balance was $110,000, and she withdrewSIO,OOOon July 1 but invested an additional $20,000 on October 1, 2011.

The partnership has a net loss of $12,000 during 2011, and the accountant in charge allocatedthenet loss as follows: $200 profit to Alex, $4,800 loss to Carl, and $7,400 loss to Erika.

ER 16

REQUIRED1. A schedule to show the correct allocation of the partnership net loss for 20 II

2. A statement of partnership capital for the year ended December 31, 20 II

3. Journal entries to correct the books of the partnership at December 31, 2011, assuming that all closingentries for the year have been recorded.

~16-5Partnership income allocation-Profit sharing based on beginning,ending, and average capital balancesA summary of changes in the capital accounts of the Katie, Lynda, and Molly partnership for 2011,before closing partnership net income to the capital accounts, is as follows:

Katie LyndaCapital Capital

Balance January 1,2011 $80,000 $80,000Investment April I 20,000Withdrawal May I (15,000)Withdrawal July I (10,000)Withdrawal September I

$90,000 $65,000

MollyCapital

TotalCapital

$90,000 $250,00020,000(15,000)(10,000)(30,000)

$215,000

R EQUI RED: Determine the allocation of the 20 II net income to the partners under each of the followingsets of independent assumptions:

1. Partnership net income is $60,000, and profit is divided on the basis of average capital balances duringthe year.

2. Partnership net income is $50,000, Katie gets a bonus of 10% of income for managing the business, andthe remaining profits are divided on the basis of beginning capital balances.

3. Partnership net loss is $35,000, Molly receives a $12,000 salary, each partner is allowed 10% interest onbeginning capital balances, and the remaining profits are divided equally.

P 16-6Partner income allocation-Correction of errorThe partnership of Jones, Keller, and Glade was created on January 2, 2011, with each of the part-ners contributing cash of $30,000. Reported profits, withdrawals, and additional investments wereas follows:

Reported Net Income Withdrawals Additional Investments

2011 $19,000 $4,000 Keller $5,000 Glade5,000 Jones

2012 22,000 8,000 Glade 5,000 Jones3,000 Keller

2013 29,000 2,000 Glade 6,000 Glade4,000 Keller

The partnership agreement provides that partners are to be allowed 10 percent interest on thebeginning-of-the-year capital balances, that Jones is to receive a $7,000 salary allowance, and thatremaining profits are to be divided equally.

After the books were closed on December 31, 2013, it was discovered that depreciation hadbeen understated by $2,000 each year and that the inventory taken at December 31, 2013, wasunderstated by $8,000.

REQUIRED1. Calculate the balances

2. Calculate the balancesthe corrections thatms

3. Give the journal entry

P 16-7Recording new pariThe partnership of AMvalue and fair value just

AssetsCashAccounts rInventoriesPlant assets-

EquitiesAccounts pa15%notepAddie capiBal capital

On January 2, 201for a 40 percent interest

REQUIRED1. Prepare journal entrie

assuming that assets (I

2. Prepare a balance shadmission of Cathy.

P 16-8Recording new pal1The capital accounts 0

profit and loss sharing I

The partners agree

R E QUI RED: Preparethe partners' capital balaassumptions:

1. Carrie sells half of hepartnership.

2. Darling invests $75,and partnership assets

3. Darling invests $80,ship assets are revalue

4. Darling invests $90,~ship assets are not rev