Concept explainers
1.
Prepare three tables and complete the tables by showing the allocation of $450,000 net income to the partners.
1.
Explanation of Solution
A partnership is an unincorporated form of business which is formed by an agreement, owned and managed mutually by two or more individuals, who invest their assets in the business and share the liabilities and profits among themselves.
Table is prepared as follows:
Income (Loss) sharing plan | Calculations | Partner C | Partner J | Partner S | Total | |
(a) | $240,000 ( divided equally) | $80,000 | $80,000 | $80,000 | $240,000 | |
(b) | $240,000 (allocated according to the initial investments) | (1)$72,000 | (2)$108,000 | (3) $60,000 | ||
Total allocated | $72,000 | $108,000 | $60,000 | $240,000 | ||
(c) | Net income | $240,000 | ||||
Salary allowances | $40,000 | $30,000 | $80,000 | ($150,000) | ||
Balance of income | $90,000 | |||||
Interest allowances | ||||||
$17,280 | ||||||
| $25,920 | |||||
| $14,400 | |||||
Total interest | ($57,600) | |||||
Balance of income | $32,400 | |||||
Balance allocated | 10,800 | 10,800 | 10,800 | (32,400) | ||
Balance of income | $0 | |||||
Shares of partners | $68,080 | $66,720 | $105,200 |
Table (1)
Note: Under plan (a) the net income of $450,000 is shared equally among the partners.
Working note:
Calculate the share of income and loss for Partner C in the ratio of their beginning capital investments under plan (a):
Calculate the share of income and loss for Partner J in the ratio of their beginning capital investments under plan (a):
Calculate the share of income and loss for Partner S in the ratio of their beginning capital investments under plan (a):
Note: The balance of income ($32,400) is shared equally among the partners.
2.
Prepare a statement of partners’ equity showing the allocation of income to the partners if it is assumed that plan (c) is agreed among the partners.
2.
Explanation of Solution
Statement of Partner’s equity:
The statement of partners’ equity reports the change in the capital accounts of partner’s during an accounting period. Additional investments, net income from income statement is added and drawings are deducted from the beginning balance of partners’ equity to get the ending balance of the partners’ equity.
Prepare statement of partners’ equity:
Partnership CJS | ||||
Statement of Partners' Equity | ||||
For Year Ended December 31 | ||||
Particulars | Person C | Person J | Person S | Total |
Beginning capital balances | $0 | $0 | $0 | $0 |
Add: | ||||
Investments by owners | $144,000 | $216,000 | $120,000 | $480,000 |
Net income | ||||
Salary allowances | $40,000 | $30,000 | $80,000 | |
Interest allowances | $17,280 | $25,920 | $14,400 | |
Balance allocated | ($40,000) | ($40,000) | ($40,000) | |
Total net income | $17,280 | $15,920 | $54,400 | $87,600 |
Total | $161,280 | $231,920 | $174,400 | $567,600 |
Less partners' withdrawals | ($18,000) | ($38,000) | ($24,000) | ($80,000) |
Ending capital balances | $143,280 | $193,920 | $150,400 | $487,600 |
Table (2)
Note: The balance of income ($120,000 (4)) is shared equally among the partners.
Working note:
Calculate the balance of income:
3.
Prepare
3.
Explanation of Solution
Prepare journal entry to close the income summary accounts:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
December 31 | Income Summary | 87,600 | ||
Partner C, Capital | 17,280 | |||
Partner J, Capital | 15,920 | |||
Partner S, Capital | 54,400 | |||
(To close the income summary) |
Table (3)
- Income summary is a component of partners’ equity and it is decreased which increases the value of partners’ equity. Therefore, debit income summary account by $87,600.
- Partner C, Capital is a component of partners’ equity and it is increased which decreases the value of partners’ equity. Therefore, credit Partner C, Capital account by $17,280.
- Partner J, Capital is a component of partners’ equity and it is increased which decreases the value of partners’ equity. Therefore, credit Partner J, Capital account by $15,920.
- Partner S, Capital is a component of partners’ equity and it is increased which decreases the value of partners’ equity. Therefore, credit Partner S, Capital account by $54,400.
Prepare journal entry to close the withdrawal accounts:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
December 31 | Partner C, Capital | 18,000 | ||
Partner J, Capital | 38,000 | |||
Partner S, Capital | 24,000 | |||
Partner C, Withdrawals | 18,000 | |||
Partner J, Withdrawals | 38,000 | |||
Partner S, Withdrawals | 24,000 | |||
(To close withdrawals accounts) |
Table (4)
- Partner C, Capital is a component of partners’ equity and it is decreased which increases the value of partners’ equity. Therefore, debit Partner C, Capital account by $18,000.
- Partner J, Capital is a component of partners’ equity and it is decreased which increases the value of partners’ equity. Therefore, debit Partner J, Capital account by $38,000.
- Partner S, Capital is a component of partners’ equity and it is decreased which increases the value of partners’ equity. Therefore, debit Partner S, Capital account by $24,000.
- Partner C, Withdrawals is a component of partners’ equity and it is increased which decreases the value of Partner C’s equity. Therefore, credit Partner C, Withdrawals account by $18,000.
- Partner J, Withdrawals is a component of partners’ equity and it is increased which decreases the value of Partner J’s equity. Therefore, credit Partner J, Withdrawals account by $38,000.
- Partner S, Withdrawals is a component of partners’ equity and it is increased which decreases the value of Partner S’s equity. Therefore, credit Partner S, Withdrawals account by $24,000.
Want to see more full solutions like this?
Chapter 12 Solutions
Principles of Financial Accounting.
- The partnership of Tasha and Bill shares profits and losses in a 50:50 ratio, and the partners have capital balances of $45,000 each. Prepare a schedule showing how the bonus should be divided if Ashanti joins the partnership with a $60,000 investment. The partners new agreement will share profit and loss in a 1:3 ratio.arrow_forwardArun and Margot want to admit Tammy as a third partner for their partnership. Their capital balances prior to Tammys admission are $50,000 each. Prepare a schedule showing how the bonus should be divided among the three, assuming the profit or loss agreement will be 1:3 once Tammy has been admitted and her contribution is: A. $20,000 B. $80,000 C. $50,000. In addition, show the resulting journal entries to each of the three partners capital accounts.arrow_forwardWatts and Lyon are forming a partnership. Watts invests $36,000 and Lyon invests $54,000. The partners agree that Watts will work one-fourth of the total time devoted to the partnership and Lyon will work three-fourths. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $15,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $15,000 per year to Lyon, 12% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $15,000 net loss; Year 2, $37,500 net income; and Year 3, $62,500 net income.arrow_forward
- Watts and Lyon are forming a partnership. Watts invests $40,500 and Lyon invests $49,500. The partners agree that Watts will work one-fourth of the total time devoted to the partnership and Lyon will work three-fourths. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $24,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $24,000 per year to Lyon, 11% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $15,000 net loss; Year 2, $37,500 net income; and Year 3, $62,500 net income. Required:Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of…arrow_forwardBums and Allan have formed a partnership and invested $20,000 and $40,000, respectively. They have agreed to share profits as follows: 1) Burns is to reccivé a "salary" of $20,000 and Allan is to receive a "salary" of $30,000. 2) $30,000 is to be allocated according to their original capital contributions to the partnership. 3) The remainder is to be allocated 2:3 respectively Assuming that the business had a loss of $15.000, allocate the loss to Burns and Allan, Ending capital balances to each partner?arrow_forwardWatts and Lyon are forming a partnership. Watts invests $40,500 and Lyon invests $49,500. The partners agree that Watts will work one-fourth of the total time devoted to the partnership and Lyon will work three-fourths. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $15,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $15,000 per year to Lyon, 11% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $13,000 net loss; Year 2, $32,500 net income; and Year 3, $54,167 net income. Required: Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of…arrow_forward
- Watts and Lyon are forming a partnership. Watts invests $40,500 and Lyon invests $49,500. The partners agree that Watts will work one-fourth of the total time devoted to the partnership and Lyon will work three-fourths. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $15,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $15,000 per year to Lyon, 11% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $13,000 net loss; Year 2, $32,500 net income; and Year 3, $54,167 net income. Required: Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of…arrow_forwardWatts and Lyon are forming a partnership. Watts invests $40,500 and Lyon invests $49,500. The partners agree that Watts will work one-fourth of the total time devoted to the partnership and Lyon will work three-fourths. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $15,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $15,000 per year to Lyon, 11% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $13,000 net loss; Year 2, $32,500 net income; and Year 3, $54,167 net income. Required: Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of…arrow_forwardWatts and Lyon are forming a partnership. Watts invests $42,000 and Lyon invests $63,000. The partners agree that Watts will work one-third of the total time devoted to the partnership and Lyon will work twothirds. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $72,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $72,000 per year to Lyon, 10% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $36,000 net loss; Year 2, $90,000 net income; and Year 3, $150,000 net income. Required Prepare three tables with the following column headings. Complete the tables, one for each of the first three years, by showing how to allocate…arrow_forward
- Watts and Lyon are forming a partnership. Watts invests $40,500 and Lyon invests $49,500. The partners agree that Watts will work one-fourth of the total time devoted to the partnership and Lyon will work three-fourths. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $15,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $15,000 per year to Lyon, 11% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $13,000 net loss; Year 2, $32,500 net income; and Year 3, $54,167 net income. Required: Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of…arrow_forwardWatts and Lyon are forming a partnership. Watts invests $24,500 and Lyon invests $45,500. The partners agree that Watts will work one-fourth of the total time devoted to the partnership and Lyon will work three-fourths. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $18,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $18,000 per year to Lyon, 9% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $17,000 net loss; Year 2, $42,500 net income; and Year 3, $70,833 net income. Required: Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of…arrow_forwardCook, Jing, and Schwartz formed the CJS Partnership by making investments of $144,000, $216,000, and $120,000, respectively. They predict annual partnership net income of $240,000 and are considering the following alternative plans of sharing income and loss: (a) equally; (b) in the ratio of their initial capital investments; or (c) salary allowances of $40,000 to Cook, $30,000 to Jing, and $80,000 to Schwartz; interest allowances of 12% on their initial capital investments; and the remaining balance shared equally. Required 1.how to distribute net income of $240,000 for the calendar year under each of the alternative plans being considered.arrow_forward
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College