Chapter 12, Problem 4BP

1.

To determine

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

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 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
		$\text{ 12\% x \$144,000}$	$17,280
		$\text{12\% x \$216,000}$		$25,920
		$\text{12\% x \$120,000}$			$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):

$\begin{array}{c}\begin{array}{l}\text{The}\text{share}\text{of}\text{income}\text{and}\\ \text{loss}\text{for}\text{Partner}\text{C}\end{array}\}\text{=}\frac{\text{Initial}\text{investment}\text{of}\text{Partner}\text{C}}{\text{Total}\text{investment}\left(\$144,000+\$216,000+\$120,000\right)}\\ \text{=}\frac{\text{\$144,000}}{\text{\$480,000}}\\ \text{=}\text{\$72,000}\end{array}$ (1)

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

$\begin{array}{c}\begin{array}{l}\text{The}\text{share}\text{of}\text{income}\text{and}\\ \text{loss}\text{for}\text{Partner}\text{J}\end{array}\}\text{=}\frac{\text{Initial}\text{investment}\text{of}\text{Partner}\text{J}}{\text{Total}\text{investment}\left(\$144,000+\$216,000+\$120,000\right)}\\ \text{=}\frac{\text{\$216,000}}{\text{\$480,000}}\\ \text{=}\text{\$108,000}\end{array}$ (2)

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

$\begin{array}{c}\begin{array}{l}\text{The}\text{share}\text{of}\text{income}\text{and}\\ \text{loss}\text{for}\text{Partner}\text{S}\end{array}\}\text{=}\frac{\text{Initial}\text{investment}\text{of}\text{Partner}\text{S}}{\text{Total}\text{investment }\left(\$144,000+\$216,000+\$120,000\right)}\\ \text{=}\frac{\text{\$120,000}}{\text{\$480,000}}\\ \text{=}\text{\$60,000}\end{array}$ (3)

Note: The balance of income ($32,400) is shared equally among the partners.

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.

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:

$\begin{array}{c}\text{Balance}\text{of}\text{income}\text{=}\left[\begin{array}{l}\text{Total}\text{net}\text{income}-\left(\text{Salary}\text{allowance}\text{of}\text{Partners}\right)-\\ \left(\text{Interest}\text{allowance}\text{of}\text{partnets}\right)\end{array}\right]\\ \text{=}\left[\begin{array}{l}\text{\$87,600}-\left(\text{\$40,000+\$30,000+\$80,000}\right)-\\ \left(\text{\$17,280+\$25,920+\$14,400}\right)\end{array}\right]\\ \text{=}\text{\$120,000}\end{array}$ (4)

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.

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.