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31.(75 Minutes) (Recording of changes in the composition of a partnership
including allocation of income)
a. 1/1/13 Building ....................................................... 52,000
Equipment.................................................... 16,000
12/31/13 Reese, capital ............................................. 22,000
O'Donnell, capital ................................. 12,000
Income summary .................................. 10,000
1/1/14 Cash ............................................................. 15,000
O'Donnell, capital (15%) ............................ 300
12/31/14 O'Donnell, capital ....................................... 10,340
Reese, capital ............................................. 5,000
Dunn, capital ............................................... 5,000
(To close out drawings accounts for the year based on
distributing 20% of each partner's beginning capital balances
[after adjustment for Dunn's investment] or $5,000 whichever is
greater. O'Donnell's capital is $51,700 [$40,000 + $12,000 – $300])
12/31/14 Income summary ....................................... 44,000
O'Donnell, capital ................................. 16,940
Reese, capital ........................................ 16,236
31.a. (continued)
O'Donnell Reese Dunn
Interest (20% of $51,700
beginning capital balance)........ $10,340
15% of $44,000 income ................... 6,600
60:40 split of remaining $27,060
Capital Balances as of December 31, 2014:
O'Donnell Reese Dunn
Initial 2013 investment .................... $40,000 $40,000
2013 profit allocation ...................... 12,000 (22,000)
Dunn's investment .......................... (300) (1,700) $17,000
1/1/15 Dunn, capital ............................................... 22,824
Postner, capital ..................................... 22,824
(To reclassify balance to reflect
acquisition of Dunn's interest.)
12/31/15 O'Donnell, capital ....................................... 11,660
Reese, capital ............................................. 5,507
greater].)
12/31/15 Income summary......................................... 61,000
O'Donnell, capital ................................. 20,810
Postner, capital ..................................... 16,076
(To allocate profit for 2015 determined as follows)
O'Donnell Reese Postner
Interest (20% of $58,300 beg. capital) $11,660
15% of $61,000 income ............. 9,150
31.a. (continued)
1/1/16 Postner, capital ........................................... 33,900
O'Donnell, capital (15%) ............................ 509
b. 1/1/13 Building........................................................ 52,000
Equipment ................................................... 16,000
Cash ............................................................. 12,000
Goodwill ...................................................... 80,000
12/31/13 Reese, capital ............................................. 30,000
O'Donnell, capital ................................. 20,000
Income summary .................................. 10,000
1/1/14 Cash ............................................................. 15,000
$15,000 + Goodwill = 20% (Current Capital + $15,000 + Goodwill)
$15,000 + Goodwill = 20% ($150,000 + $15,000 + Goodwill)
31. b. (continued)
12/31/14 O'Donnell, capital ....................................... 20,000
Reese, capital ............................................. 10,000
Dunn, capital ............................................... 7,500
$50,000, and Dunn—$37,500.)
12/31/14 Income summary ....................................... 44,000
O'Donnell, capital ................................. 26,600
Reese, capital ........................................ 10,440
Dunn, capital ......................................... 6,960
(To allocate $44,000 income figure as follows)
O'Donnell Reese Dunn
Interest (20% of $100,000
beginning capital balance) $20,000
Capital balances as of December 31, 2014:
O'Donnell Reese Dunn
Initial 2013 investment ... $ 80,000 $80,000
2013 profit allocation ...... 20,000 (30,000)
1/1/15 Goodwill ...................................................... 26,588
O'Donnell, capital (15%) ....................... 3,988
Reese, capital (51%) ............................. 13,560
Dunn, capital (34%) .............................. 9,040
(To record goodwill indicated by purchase of Dunn's interest.)
In effect, profits are shared 15% to O'Donnell, 51% to Reese – (60% of the 85%
remaining after O'Donnell's income), and 34% to Dunn (40% of the 85%
remaining after O'Donnell's income). Postner is paying $46,000, an amount
based on the excess payment.
31. b. (continued)
1/1/15 Dunn, capital .................................................... 46,000
Postner, capital ........................................... 46,000
(To reclassify capital balance to new partner.)
O'Donnell, drawings .................................. 22,118
Reese, drawings ......................................... 12,800
Postner, drawings ...................................... 9,200
(To close out drawings accounts for the year based on 20% of beginning
capital balances [after adjustment for goodwill].)
12/31/15 Income summary ............................................. 61,000
To allocate profit for 2015 as follows:
O'Donnell Reese Postner
60:40 split of remaining
$29,732 ............................. $17,839 $11,893
Totals ................................ $31,268 $17,839 $11,893
Capital Balances as of December 31, 2015:
O'Donnell Reese Postner
12/31/15 balances.................. $119 ,738 $69 ,039 $48 ,693
Postner will be paid $53,562 (110% of the capital balance) for her interest. This
amount exceeds her capital balance by $4,869. Because Postner is only
entitled to a 34% share of profits and losses, the additional $4,869 indicates
that the partnership as a whole is undervalued by $14,321 (4,869 ÷ 34%). Only
in that circumstance is the extra payment to Postner justified:
31. b. (continued)
1/1/16 Goodwill ................................................................. 14,321
O'Donnell, capital (15%) .................................. 2,148
Develop Your Skills
Research Case
This assignment allows the student to make use of the SEC website and, then,
the EDGAR system. It also provides a chance to use actual statements created
for a partnership rather than those typically produced for a corporation.
Probably the most noticeable characteristic of the statements for Buckeye
Partners is that they resemble corporate financial statements in most ways. A
casual overview might not bring any differences to mind. However, a close
reading will show several differences including the following:
On the income statement, net income is allocated between the general
partner and limited partners.
Also, on the income statement earnings per share is replaced with a figure
labeled as “earnings per partnership unit.”
Analysis Case
An unlimited number of allocation plans can be developed for any partnership.
Here, Wilson will be interested in some reward for investing the capital used to
One possibility would be to accrue interest to Wilson on her capital balance for
the year based, perhaps, on the prime rate. Poncelet could be assigned a
As an alternative, Wilson could be allocated an interest factor but only based on
the initial amount invested in the business rather than the capital balance as a
whole. Higgins could be assigned some type of allowance for the number of
Communication Cases 1 and 2
These two cases ask the student to identify the types of factors that will lend
themselves toward the organization becoming a corporation (in Case 1) or a
partnership (in Case 2). Several issues should be considered when looking into a
legal format for a business enterprise:
Do state laws play any role in the decision? In some states, particular
types of organizations are prohibited from operating as a corporation. Will
state law come into play in making this decision? If so, the partnership
form of organization will be required.
involved, the two owners may need the corporate type of organization just
for their own financial security.
How well do the owners know and trust each other? As with the previous
comment, potential liability can be greatly enhanced if the owners do not
know each other well or if additional owners are expected to join at a later
point in time. Under that circumstance, everyone may feel more
How much money do they have available to create a legal organization? In
most states, creation of a partnership can be virtually free whereas the
legal formality of a corporation can cost money. If finances are tight, the
Excel Case: There are a variety of ways to create a spreadsheet to solve this particular problem.
Here is one possible approach:
In Cell A1, enter text “Net Income” and in Cell B1 enter $200,000.
In Cell A2, enter text “Billable Hours–Red”. In Cell B2 enter 2,000. In Cell C2, enter $20 hourly rate.
In Cell A3, enter text “Billable Hours–Blue”. In Cell B3 enter 1,500. In Cell C3, enter $30 hourly rate.
In Cell A4, enter text “Investment–Red” and in Cell B4 enter $80,000. In Cell C4, enter the rate of
return of 10%.
Subtract the subtotal of the partner’s initial allocations (Cell D6) from the Net Income (Cell B1)
with the following formula: In Cell A8, enter the label text “Profit to be Split” and in Cell D8, enter
the following formula: =+B1-D6.
Determine the distribution of Profit between partners:
Example:
Net Income $200,000
Billable Hours-Red 2,000 $20 $40,000
Billable Hours-Blue 1,500 $30 45,000
Investment-Red $80,000 10% 8,000
Profit-Blue 50% $51,000
