Principles of Financial Accounting.
Principles of Financial Accounting.
22nd Edition
ISBN: 9780077632892
Author: John J. Wild
Publisher: McGraw Hill
Question
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Chapter 12, Problem 3AP

1.

To determine

Prepare three tables and complete the tables by showing the allocation of $450,000 net income to the partners.

1.

Expert Solution
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Explanation of Solution

Partnership:

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 planCalculationsPartner  BPartner  BPartner  BTotal
(a)$450,000 ( divided equally)$150,000 $150,000 $150,000 $450,000
(b)$450,000 (allocated according to the initial investments)(1)$40,500  (2)$157,500(3) $252,000 
Total allocated $40,500 $157,500 $252,000 $450,000
(c)Net income    $450,000
 Salary allowances $80,000 $60,000 $90,000 ($230,000)
 Balance of income    $220,000
 Interest allowances    
   10% x $67,500 $6,750    
    10% x $262,500  $26,250   
    10% x $420,000   $42,000  
 Total interest    ($75,000)
 Balance of income    $145,000
 Balance allocated (4)$29,000 (5)$58,000 (6)$58,000  (145,000)
 Balance of income    $0
 Shares of partners $115,750 $144,250 $190,000  

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 B in the ratio of their beginning capital investments under plan (a):

TheshareofincomeandlossforPartnerB}=InitialinvestmentofPartnerBTotalinvestment=$67,500$750,000=$40,500 (1)

Calculate the share of income and loss for Partner B in the ratio of their beginning capital investments under plan (a):

TheshareofincomeandlossforPartnerB}=InitialinvestmentofPartnerBTotalinvestment=$262,500$750,000=$157,500 (2)

Calculate the share of income and loss for Partner B in the ratio of their beginning capital investments under plan (a):

TheshareofincomeandlossforPartnerB}=InitialinvestmentofPartnerBTotalinvestment=$420,000$750,000=$252,000 (3)

Calculate the balance of income allocated to Partner B under plan (c):

BalanceofincomeallocatedtoPartnerB)=Balanceofincome×20%=$145,000×20%=$29,000 (4)

Calculate the balance of income allocated to Partner B under plan (c):

BalanceofincomeallocatedtoPartnerB)=Balanceofincome×40%=$145,000×40%=$58,000 (5)

Calculate the balance of income allocated to Partner B under plan (c):

BalanceofincomeallocatedtoPartnerB)=Balanceofincome×40%=$145,000×40%=$48,000 (6)

2.

To determine

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.

Expert Solution
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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 BBB
Statement of  Partners' Equity
For Year Ended December 31
ParticularsPartner BPartner BPartner BTotal
Beginning capital balances $0 $0 $0 $0
Add:    
Investments by owners $67,500 $262,500 $420,000 $750,000
Net income    
Salary allowances $80,000 $60,000 $90,000  
Interest allowances $6,750 $26,250 $42,000  
Balance allocated  (8)($19,200)(9)($38,400)(10)($38,400) 
Total net income $67,550 $47,850 $93,600 $209,000
Total $135,050 $310,350 $513,600 $959,000
Less partners'  withdrawals ($34,000)($48,000)($64,000)($146,000)
Ending capital balances $101,050 $262,350 $449,600 $813,000

Table (2)

Working note:

Calculate the balance of income:

Balanceofincome=[Totalnetincome(SalaryallowanceofPartners)(Interestallowanceofpartnets)]=[$209,000($80,000+$60,000+$90,000)($6,750+$26,250+$42,000)]=$96,000 (7)

Calculate the balance of income allocated to Partner B:

BalanceofincomeallocatedtoPartnerB)=Balanceofincome×20%=$96,000(7)×20%=$19,200 (8)

Calculate the balance of income allocated to Partner B:

BalanceofincomeallocatedtoPartnerB)=Balanceofincome×40%=$96,000 (7)×40%=$38,400 (9)

Calculate the balance of income allocated to Partner B:

BalanceofincomeallocatedtoPartnerB)=Balanceofincome×40%=$96,000 (7)×40%=$38,400 (10)

3.

To determine

Prepare journal entry to close the income summary, assuming that plan (c) is agreed among the partners and also close the withdrawals accounts.

3.

Expert Solution
Check Mark

Explanation of Solution

Prepare journal entry to close the income summary accounts:

DateAccount Title and ExplanationDebit ($)Credit ($)
December 31Income Summary209,000
     Partner B, Capital67,550
     Partner B, Capital47,850
     Partner B, Capital93,600
(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 $209,000.
  • Partner B, Capital is a component of partners’ equity and it is increased which decreases the value of partners’ equity. Therefore, credit Partner M, Capital account by $67,550.
  • Partner B, Capital is a component of partners’ equity and it is increased which decreases the value of partners’ equity. Therefore, credit Partner L, Capital account by $47,850.
  • Partner B, Capital is a component of partners’ equity and it is increased which decreases the value of partners’ equity. Therefore, credit Partner B, Capital account by $93,600.

Prepare journal entry to close the withdrawal accounts:

DateAccount Title and ExplanationDebit ($)Credit ($)
December 31Partner B, Capital34,000
Partner B, Capital48,000
Partner B, Capital64,000
     Partner B, Withdrawals34,000
     Partner B, Withdrawals48,000
     Partner B, Withdrawals64,000
(To close withdrawals accounts)

Table (4)

  • Partner B, Capital is a component of partners’ equity and it is decreased which increases the value of partners’ equity. Therefore, debit Partner M, Capital account by $34,000.
  • Partner B, Capital is a component of partners’ equity and it is decreased which increases the value of partners’ equity. Therefore, debit Partner L, Capital account by $48,000.
  • Partner B, Capital is a component of partners’ equity and it is decreased which increases the value of partners’ equity. Therefore, debit Partner B, Capital account by $64,000.
  • Partner B, Withdrawals is a component of partners’ equity and it is increased which decreases the value of partner M’s equity. Therefore, credit Partner M, Withdrawals account by $34,000.
  • Partner B, Withdrawals is a component of partners’ equity and it is increased which decreases the value of partner L’s equity. Therefore, credit Partner L, Withdrawals account by $48,000.
  • Partner B, Withdrawals is a component of partners’ equity and it is increased which decreases the value of partner B’s equity. Therefore, credit Partner B, Withdrawals account by $64,000.

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