Question: Gray, Stone, and Lawson open an accounting
Gray, Stone, and Lawson open an accounting practice on January 1, 2016, in San Diego, California,to be operated as a partnership. Gray and Stone will serve as the senior partners because oftheir years of experience. To establish the business, Gray, Stone, and Lawson contribute cash andother properties valued at $210,000, $180,000, and $90,000, respectively. An articles of partnershipagreement is drawn up. It has the following stipulations:
∙ Personal drawings are allowed annually up to an amount equal to 10 percent of the beginningcapital balance for the year.
∙ Profits and losses are allocated according to the following plan:
1. A salary allowance is credited to each partner in an amount equal to $8 per billable hourworked by that individual during the year.
2. Interest is credited to the partners’ capital accounts at the rate of 12 percent of the averagemonthly balance for the year (computed without regard for current income or drawings).
3. An annual bonus is to be credited to Gray and Stone. Each bonus is to be 10 percent of netincome after subtracting the bonus, the salary allowance, and the interest. Also included inthe agreement is the provision that there will be no bonus if there is a net loss or if salary andinterest result in a negative remainder of net income to be distributed.
4. Any remaining partnership profit or loss is to be divided evenly among all partners.
Because of financial shortfalls encountered in getting the business started, Gray invests an additional$9,100 on May 1, 2016. On January 1, 2017, the partners allow Monet to buy into the partnership.Monet contributes cash directly to the business in an amount equal to a 25 percent interest inthe book value of the partnership property subsequent to this contribution. The partnership agreementas to splitting profits and losses is not altered upon Monet’s entrance into the firm; the generalprovisions continue to be applicable.
The billable hours for the partners during the first three years of operation follow:
The partnership reports net income for 2016 through 2018 as follows:
2016 . . . . . . . . . . . . . . . $ 65,000
2017 . . . . . . . . . . . . . . . (20,400)
2018 . . . . . . . . . . . . . . . 152,800
Each partner withdraws the maximum allowable amount each year.
a. Determine the allocation of income for each of these three years (to the nearest dollar).
b. Prepare in appropriate form a statement of partners’ capital for the year ending December 31,2018.
Transcribed Image Text:
2016 2017 2018 Gray... 1,7 10 1,800 1,880 Stone. 1,440 1,500 1,620 1,310 Lawson 1,300 1,380 Monet.... -0- 1,190 1,580
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