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 M | Partner L | Partner B | Total | |
(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 | ||||||
$6,750 | ||||||
| $26,250 | |||||
| $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 M in the ratio of their beginning capital investments under plan (a):
Calculate the share of income and loss for Partner L in the ratio of their beginning capital investments under plan (a):
Calculate the share of income and loss for Partner B in the ratio of their beginning capital investments under plan (a):
Calculate the balance of income allocated to Partner M under plan (c):
Calculate the balance of income allocated to Partner L under plan (c):
Calculate the balance of income allocated to Partner B under plan (c):
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 MLB | ||||
Statement of Partners' Equity | ||||
For Year Ended December 31 | ||||
Particulars | Person M | Person L | Person B | Total |
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 | $813,000 |
Table (2)
Working note:
Calculate the balance of income:
Calculate the balance of income allocated to Partner M:
Calculate the balance of income allocated to Partner L:
Calculate the balance of income allocated to Partner B:
3.
Prepare
3.
Explanation of Solution
Prepare journal entry to close the income summary accounts:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
December 31 | Income Summary | 209,000 | ||
Partner M, Capital | 67,550 | |||
Partner L, Capital | 47,850 | |||
Partner B, Capital | 93,600 | |||
(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 M, 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 L, 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 $93,600.
Prepare journal entry to close the withdrawal accounts:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
December 31 | Partner M, Capital | 34,000 | ||
Partner L, Capital | 48,000 | |||
Partner B, Capital | 64,000 | |||
Partner M, Withdrawals | 34,000 | |||
Partner L, Withdrawals | 48,000 | |||
Partner B, Withdrawals | 64,000 | |||
(To close withdrawals accounts) |
Table (4)
- Partner M, 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 L, 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 M, 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 L, 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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Chapter 12 Solutions
Principles of Financial Accounting.
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- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College