Concept explainers
From accounting point of view partnership requires recognition of several important factors,
- From accounting point of view partnership is a separate business entity.
- The partnership accounts for their operations using accrual accounting.
- Most partnerships are not required to furnish financial statements annually and they are not required to have annual audit of their financial statements.
Allocation of
Requirement 1
The preparation of a classified balance sheet as of January 2, 20X3 for H and S partnership, based on given information.
Answer to Problem 15.18P
Total assets and liabilities, equity for year 20X3 is $744,500
Explanation of Solution
H and S partnership
Balance sheet
As at January 2, 20X3
| Amount $ | Amount $ | |
| Assets | ||
| Current assets: | ||
| Cash | 55,000 | |
| Temporary investment | 81,500 | |
| Trade accounts receivable | 70,000 | |
| Less: allowance for uncollectible | (4,500) | 65,500 |
| Note receivable | 50,000 | |
| Inventories | 62,500 | |
| Total current assets | 314,500 | |
| Non-current assets: | ||
| Property plant and equipment: | ||
| Buildings | 600,000 | |
| Less Accumulated depreciation | (230,000) | 370,000 |
| Intangible Assets: | ||
| Customer lists | 60,000 | |
| Total Assets | 744,500 | |
| Liabilities and Partnership capital: | ||
| Current liabilities: | ||
| Current proportion of mortgage payable | 25,000 | |
| Long- term liabilities: | ||
| Mortgage payable | 150,000 | |
| Partnership capital | ||
| H’s capital | 327,000 | |
| S capital | 242,500 | 569,500 |
| Total Liabilities and Capital | 744,500 |
II.a
Partnership: The partnership is a popular form of business because it is easy to form and allows several individuals to combine their talents, skills and resources in a particular business. In addition partnerships allow the sharing of risks for rapidly growing business.
From accounting point of view partnership requires recognition of several important factors,
- From accounting point of view partnership is a separate business entity.
- The partnership accounts for their operations using accrual accounting.
- Most partnerships are not required to furnish financial statements annually and they are not required to have annual audit of their financial statements.
Allocation of profit and loss to partners: Allocation of profit and loss to partners will be in accordance with partnership agreement. If the entity does not have formal partnership agreement, section 401 of the UPA 1997 indicates that profit and losses are distributed equally among partners. Profit distributions are not included in the partnership’s income statement, but recorded directly into partner’s capital accounts, not treated as expense items.
Requirement 2
The preparation of income statement for H and S for the year ended December 20X3.
II.a
Answer to Problem 15.18P
Net income for the year ended December 31, 20X3 $260,000
Explanation of Solution
| Amount $ | |
| Revenue | 650,000 |
| Less cost of goods sold | (320,000) |
| Gross profit | 330,000 |
| Operating expenses: | |
| Selling, general and Administrative expenses | (70,000) |
| Net income | 260,000 |
II.b
Partnership: The partnership is a popular form of business because it is easy to form and allows several individuals to combine their talents, skills and resources in a particular business. In addition partnerships allow the sharing of risks for rapidly growing business.
From accounting point of view partnership requires recognition of several important factors,
- From accounting point of view partnership is a separate business entity.
- The partnership accounts for their operations using accrual accounting.
- Most partnerships are not required to furnish financial statements annually and they are not required to have annual audit of their financial statements.
Allocation of profit and loss to partners: Allocation of profit and loss to partners will be in accordance with partnership agreement. If the entity does not have formal partnership agreement, section 401 of the UPA 1997 indicates that profit and losses are distributed equally among partners. Profit distributions are not included in the partnership’s income statement, but recorded directly into partner’s capital accounts, not treated as expense items.
Requirement 3
The preparation of income distribution schedule for 20X3.
II.b
Answer to Problem 15.18P
His entitled to get $130,800 and S will get $129,200 of total profit.
Explanation of Solution
| H | S | Total | |
| Percentage of profit | 20% | 80% | 100% |
| Net income | 260,000 | ||
| 10% bonus to H $260,000 x .10 | 26,000 | (26,000) | |
| Salaries to partners | 90,000 | 70,000 | (160,000) |
| Residual income | 74,000 | ||
| Allocation 20%: 80% | 14,800 | 59,200 | (74,000) |
| Total | 130,800 | 129,200 | 0 |
II.c
Partnership: The partnership is a popular form of business because it is easy to form and allows several individuals to combine their talents, skills and resources in a particular business. In addition partnerships allow the sharing of risks for rapidly growing business.
From accounting point of view partnership requires recognition of several important factors,
- From accounting point of view partnership is a separate business entity.
- The partnership accounts for their operations using accrual accounting.
- Most partnerships are not required to furnish financial statements annually and they are not required to have annual audit of their financial statements.
Allocation of profit and loss to partners: Allocation of profit and loss to partners will be in accordance with partnership agreement. If the entity does not have formal partnership agreement, section 401 of the UPA 1997 indicates that profit and losses are distributed equally among partners. Profit distributions are not included in the partnership’s income statement, but recorded directly into partner’s capital accounts, not treated as expense items.
Requirement 3
The capital balance of each partner to be appeared in balance sheet dated December 31, 20X3.
II.c
Answer to Problem 15.18P
H’s capital balance $447,800 and S capital balance $366,700
Explanation of Solution
| H | S | Total | |
| Capital balance January 20X3 | 327,000 | 242,500 | 569,500 |
| Add net income 20X3 | 130,800 | 129,200 | 260,000 |
| Less withdrawals during the year | (10,000) | (5,000) | (15,000) |
| Capital balance December 31, 20X3 | 447,800 | 366,700 | 814,500 |
II.d
Partnership: The partnership is a popular form of business because it is easy to form and allows several individuals to combine their talents, skills and resources in a particular business. In addition partnerships allow the sharing of risks for rapidly growing business.
From accounting point of view partnership requires recognition of several important factors,
- From accounting point of view partnership is a separate business entity.
- The partnership accounts for their operations using accrual accounting.
- Most partnerships are not required to furnish financial statements annually and they are not required to have annual audit of their financial statements.
Allocation of profit and loss to partners: Allocation of profit and loss to partners will be in accordance with partnership agreement. If the entity does not have formal partnership agreement, section 401 of the UPA 1997 indicates that profit and losses are distributed equally among partners. Profit distributions are not included in the partnership’s income statement, but recorded directly into partner’s capital accounts, not treated as expense items.
Requirement 4
The partnership net income received by each partner would be same under given situation
II.d
Answer to Problem 15.18P
When the net income is $263,636 the income received by each partner will be $131,818
Explanation of Solution
To illustrate, assume that partnership net income is increased by $1,000
| H | S | Total | |
| Percentage of profit | 20% | 80% | 100% |
| Net income | 261,000 | ||
| 10% bonus to H $260,000 x .10 | 26,100 | (26,100) | |
| Salaries to partners | 90,000 | 70,000 | (160,000) |
| Residual income | 74,900 | ||
| Allocation 20%: 80% | 14,980 | 59,920 | (74,900) |
| Total | 131,080 | 129,920 | 0 |
The increase of $1,000 in net income resulted increase in H’s share by $280 (131,080 -130,800) and S’s share by $720 (129,920 -129,200) that means S share increased by $440 then H’s share ($720 - $280) or S receives 44% more than H in $1,000.
At the partnership income $260,000, H received $1,600 more net income than S (130,800 − 129,200)
When difference between these two incomes is divided by 44% we will get net required increase in net income where both the partners receive same share on income
Hence net increase in income required is $1,600 / .44 = $3,636
| H | S | Total | |
| Percentage of profit | 20% | 80% | 100% |
| Net income after increase of $3,636 | 263,636 | ||
| 10% bonus to H $260,000 x .10 | 26,363.6 | (26,363.6) | |
| Salaries to partners | 90,000 | 70,000 | (160,000) |
| Residual income | 77,272.4 | ||
| Allocation 20%: 80% | 15,454.5 | 61,878 | (77,272.4) |
| Total | 131,818 | 131,818 | 0 |
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Chapter 15 Solutions
Advanced Financial Accounting
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