26. (45 Minutes) (P&L allocations and admission of a new partner)
a. The interest factor was probably inserted to reward Hugh for contributing
$50,000 more to the partnership than Jacobs. The salary allowance gives
b. The drawings show the assets removed by a partner during a period of
time. A salary allowance is added to each partner’s capital for the year
(usually in recognition of work done) and is a component of net income
c. Hugh, drawings …………..……………….……………..…..… 7,500
Repair expense ………………………..…..….….….….... 7,500
(To reclassify payment made to repair personal residence.)
(To close drawings accounts for 2014.)
Revenues ………..………..……….………..……….………..….. 175,000
Expenses (adjusted by first entry) …………..….…. 138,500
Income summary ……………………..…..….….…..…... 36,500
(To close revenue and expense accounts for 2014.)
(To close net income to partners’ capital–see allocation plan shown below.)
Allocation of Income Hugh Jacobs
Interest (10% of beginning balance) $ 15,000
$ 10,000
Salary allowances 5,000
25,000
Remaining income (loss):
Net income $ 36,500
26. (continued)
d. Total capital (original balances of $250,000 plus 2014
net income less drawings) …………..……………..…. $256,000
Investment by Thomas ………….……….…..….….….…... 64,000
Total capital after investment ……………….…………….. $320,000
Ownership portion acquired by Thomas .….….…..... 15%
Bonus to Jacobs (60%) ………….………..……….………… $9,600
Cash ……..……….………..……….………..……….………….… 64,000
Thomas, capital (20% of total capital) ................ 48,000
Hugh, capital ………………….…….…..….….…..….…... 6,400
Jacobs, capital ………………….……………….….….….. 9,600
27. (40 Minutes) (Reporting a change in the composition of a partnership)
a. Exact amount of investment can only be computed algebraically:
E Investment = 25% (Original Capital + E Investment)
E Investment = $90,000
b. Implied value of partnership ($36,000 ÷ 10%).......... $360,000
Allocation of Goodwill:
A (30%) ……….……….………..……….……….…..….….. $16,200
B (10%) ……….……….………..……….……….…..….….. 5,400
CAPITAL BALANCES
ABCDE
Original balances $20,000 $40,000 $ 90,000 $120,000 $-0-
c. Because E’s investment of $42,000 is less than 20% of the resulting capital
($312,000). E is apparently bringing some other attribute to the partnership
(goodwill) that must be computed:
E Investment = 20% (Original Capital + E Investment)
E’s investment is, therefore, $42,000 in cash and $25,500 in goodwill for a total
27.(continued)
d. Total capital after investment ($270,000 + $55,000) $325,000
Amount acquired by E …………..……….…..….….…..….. 20%
E’s capital balance ………………………….….…..….….….. $ 65,000
E’s payment ………………….…………….….….…..….….….. 55,000
Bonus being given to E …………….…..….…..….….….… $ 10,000
Bonus from:
CAPITAL BALANCES
ABCDE
Original balances $20,000 $40,000 $90,000 $120,000 $-0-
Investment -0- -0- -0- -0- 55,000
e. C’s capital balance $ 90,000
C’s collection (125%) 112,500
Bonus being paid to C $ 22,500
Bonus from:
A (1/3) $7,500
CAPITAL BALANCES
A B C D
Original balances ….….......... $20,000 $40,000 $ 90,000 $120,000
28.(55 Minutes) (Allocation of income to the partners and determination of capital
balances)
ALLOCATION OF INCOME—2013
Boswell Johnson Total
Salary (8 months) ….….….….. $8,000 $-0- $ 8,000
STATEMENT OF PARTNERS’ CAPITAL—DECEMBER 31, 2013
Boswell Johnson Total
Beginning Balances ($114,000
Invested capital split evenly—
market value used for assets) $57,000 $57,000 $114,000
WALPOLE INVESTMENT JANUARY 1, 2014
Walpole’s $54,000 investment increases total capital to $179,000. Walpole is
ALLOCATION OF INCOME—2014
Boswell Johnson Walpole Total
Salary ……….……….…………….. $12,000 $-0- $24,000 $36,000
Remaining $8,000 loss ($28,000 –
STATEMENT OF PARTNERS’ CAPITAL—DECEMBER 31, 2014
Boswell Johnson Walpole Total
Beginning balances ............. $66,200 $58,800 $ -0- $125,000
Walpole’s contribution ……… (7,040) (10,560) 71,600 54,000
Ending balances ............. $65 ,200 $39 ,400 $82 ,400 $187 ,000
28.(continued)
ADMISSION OF POPE—JANUARY 1, 2015
Pope’s payment was made directly to the partners. Therefore, neither goodwill
nor a bonus need be recognized. Instead, 10% of each capital balance shown
above will be reclassified to Pope. The journal entry would be as follows:
ALLOCATION OF INCOME—2015
Boswell Johnson Walpole Pope Total
Salary $12,000 $-0- $24,000 $9,600 $45,600
STATEMENT OF PARTNERSHIP CAPITAL—DECEMBER 31, 2015
Boswell Johnson Walpole Pope Total
Beginning balances $65,200 $39,400 $82,400 $-0– $187,000
Admission of Pope (6,520) (3,940) (8,240) 18,700 -0-
Allocation of income
$209,000
29. (60 Minutes) (Allocate income and prepare a statement of partners’ capital)
a. Income Allocation—2013
Gray Stone Lawson Totals
Salary allowance ($8 per billable
Bonus (not applicable because
salary and interest would
necessitate a negative bonus) -0- -0- -0- -0-
Remaining loss (split evenly):
$ 65,000
(35,600)
(28,928)
Profit allocation $29 ,965 $23 ,477 $11 ,558 $65 ,000
Note A: Interest for Stone and Lawson is calculated at 12% of their beginning
Capital Account Balances—1/1/13 – 12/31/13
Gray Stone Lawson Totals
Beginning contributions $210,000 $180,000 $90,000
$480,000
Added Investment 9,100 -0- -0- 9,100
Profit allocation (from above) 29,965 23,477 11,558 65,000
$506,100
Prior to developing the information for 2014, a computation of Monet’s
investment must be made:
Monet’s Investment = 25% ($506,100 + Monet’s Investment)
29. a. (continued)
Income Allocation—2014
Gray Stone Lawson Monet Totals
Salary allowance ($8
per billable hour) $14,400 $ 12,000 $ 11,040 $ 9,520 $ 46,960
Interest (12% of begin-
ning capital balances
Bonus (not applicable) -0- -0- -0- -0- -0-
Remaining loss (split
evenly):
$ (20,400)
$(20,400)
Capital Account Balances 1/1/14 – 12/31/14
Gray Stone Lawson Monet Totals
Beginning balances $228,065 $185,477 $92,558 $168,700
$674,800
Loss allocation (from
$586,920
Income Allocation—2015
Gray Stone Lawson Monet Totals
Salary allowance ($8
per billable hour) $15,040 $12,960 $10,480 $12,640 $ 51,120
Remaining profit split
evenly:
$152,800
(51,120)
(70,430)
29.a. (continued)
Note B: The bonus to Gray and Stone can only be derived algebraically.
Because each of the two partners is entitled to 10% of net income as defined,
the total bonus is 20% and can be computed as follows:
Capital Account Balances 1/1/15 – 12/31/15
Gray Stone Lawson Monet Totals
Beginning balances $209,943 $164,102 $68,365 $144,510
$586,920
Profit allocation (from
above) 49,347 41,766 25,195 36,492 152,800
b.
GRAY, STONE, LAWSON, and MONET
Statement of Partners’ Capital
For Year Ending December 31, 2015
Gray Stone Lawson Monet Totals
Beginning balances $209,943 $164,102 $68,365 $144,510
$586,920
Profit allocation (from
above) 49,347 41,766 25,195 36,492 152,800
30.(40 Minutes) (Recording admission and retirement of partners using both the
bonus and goodwill methods)
a. Porthos, capital ………….………..…..….….…..….….….…. 35,000
b. Goodwill …….………..……….………..……….…..….….… 50,000
Athos, capital (50%) ………………….………..………… 25,000
(To record goodwill based on $250,000 implied value of partnership [$25,000
÷ 10%]. Because current capital is only $200,000 [the $25,000 goes directly
to the partners], goodwill of $50,000 has to be recorded and allocated using
profit and loss ratio.)
Athos, capital (10% of balance) …………..….….….…... 10,500
c. Cash ……..……….………..……….………..……….………….… 30,000
D’Artagnan, capital (10% of total capital).….….... 23,000
Athos, capital (50% of excess payment) ............ 3,500
$7,000 payment being recorded as a bonus to the original partners.)
d. Cash ……..……….………..……….………..……….………….… 30,000
Goodwill ………..……….………..……………….….…..….…... 70,000
D’Artagnan, capital …………………….…..….….….….. 30,000
Athos, capital (50% of goodwill) ……………….…… 35,000
Porthos, capital (30% of goodwill) ..….….…..…... 21,000
partners.)
30. (continued)
e. Cash ……………….………..……….………..……….………….… 12,222
Goodwill . ………….……….………..………….…..….….….…. 10,000
D’Artagnan, capital …………………….…..….….….….. 22,222
To record investment by D’Artagnan. The implied value of the investment as
a whole would be only $122,220 ($12,222 ÷ 10%). Because the capital
balances are well in excess of this figure, D’Artagnan is apparently bringing
some other factor (goodwill) into the partnership. This goodwill can be
computed as follows:
f. Goodwill …….………..……….………..…..….….…..….….….. 80,000
Athos, capital (50%) ………….……….………..………… 40,000
Porthos, capital (30%) ………………..….….….…..….. 24,000