Gray Stone and Lawson open an accounting practice on January

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 of their years of experience. To establish the business, Gray, Stone, and Lawson contribute cash and other properties valued at $250,000, $220,000, and $110,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations:

1. Personal drawings are allowed annually up to an amount equal to 10 percent of the beginning capital balance for the year.

2. Profits and losses are allocated according to the following plan:

3. A salary allowance is credited to each partner in an amount equal to $8 per billable hour worked by that individual during the year.

Interest is credited to the partners’ capital accounts at the rate of 12 percent of the average monthly balance for the year (computed without regard for current income or drawings).

An annual bonus is to be credited to Gray and Stone. Each bonus is to be 10 percent of net income after subtracting the bonus, the salary allowance, and the interest. Also included in the agreement is the provision that there will be no bonus if there is a net loss or if salary and interest result in a negative remainder of net income to be distributed.

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 $9,600 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 20 percent interest in the book value of the partnership property subsequent to this contribution. The partnership agreement as to splitting profits and losses is not altered upon Monet’s entrance into the firm; the general provisions 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:

Each partner withdraws the maximum allowable amount each year.

Question 1: Determine the allocation of income for each of these three years.

Question 2: Prepare in appropriate form a statement of partners’ capital for the year ending December 31, 2018.

	2016	2017	2018
Gray	1,750	2,200	1,920
Stone	1,480	1,400	1,660
Lawson	1,700	1,420	1,350
Monet	0	1,230	1,620

Solution

a. Income Allocation—2016 Gray Stone Lawson Total Hours 1750 1480 1700 Salary allowance ($8 per billable hour) $14,000 $11,840 $13,600 $39,440 Interest (working Note A) $30,768 $26,400 $13,200 $70,368 Bonus (not applicable salary and interest would have negative balance $0 $0 $0 $0 Remaining loss (split evenly):($62,000 - ($39,440+$70,368) -$15,936 -$15,936 -$15,936 -$47,808 Profit allocation $28,832 $22,304 $10,864 $62,000 Working Note A: Interest Gray Stone Lawson Beginning Capital $250,000 $220,000 $110,000 Interest 12% ; Gray = ($250,000 x 12% x 4/12)+($250,00+9,600 )x12% x 8/12) $30,768 $26,400 $13,200 Capital Account Balances—1/1/16 – 12/31/16 Gray Stone Lawson Total Beginning contributions $250,000 $220,000 $110,000 $580,000 Added Investment $9,600 $0 $0 $9,600 Profit allocation (from above) $28,832 $22,304 $10,864 $62,000 Drawing (10% of beginning balances) -$25,000 -$22,000 -$11,000 -$58,000 Ending balances $263,432 $220,304 $109,864 $593,600 Income Allocation—2014 Gray Stone Lawson Monet Total Hours 2200 1400 1420 1230 Salary allowance ($8 per billable hour) $17,600 $11,200 $11,360 $9,840 $50,000 Interest (12% x Ending Bal of 2016) $31,611.84 $26,436.48 $13,183.68 $17,808 $89,040 Bonus (not applicable salary and interest would have negative balance $0 $0 $0 $0 $0 Remaining loss (split evenly):(-$24,400 - ($50000+$94,976) -$40,860 -$40,860 -$40,860 -$40,860 -$163,440 Profit allocation $8,351.84 -$3,223.52 -$16,316.32 -$13,212 -$24,400 Working Note B: Monet Capital Monet\'s Investment = 20% ($593,600 + Monet\'s Investment) .80 Monet\'s Investment = $118720 Monet\'s Investment $148,400 Capital Account Balances—1/1/17 – 12/31/17 Gray Stone Lawson Monet Total Beginning contributions $263,432 $220,304 $109,864 $148,400 $742,000 Profit allocation (from above) $8,351.84 -$3,223.52 -$16,316.32 -$13,212 -$24,400 Drawing (10% of beginning balances) -$26,343.2 -$22,030.4 -$10,986.4 -$14,840 -$74,200 Ending balances $245,440.64 $195,050.08 $82,561.28 $120,348 $643,400 Income Allocation—2018 Gray Stone Lawson Monet Total Hours 1920 1660 1350 1620 Salary allowance ($8 per billable hour) $15,360 $13,280 $10,800 $12,960 $52,400 Interest (12% x Ending Bal of 2013) $29,452.88 $23,406.01 $9,907.35 $14,441.76 $77,208 Bonus (not applicable salary and interest would have negative balance $3,116 $3,116 $0 $0 $6,232 Remaining loss (split evenly):($167,000 - ($52,400+$77,208+$6232) $7,790 $7,790 $7,790 $7,790 $31,160 Profit allocation $55,718.88 $47,592.01 $28,497.35 $35,191.76 $167,000 Working Note C: Bonus = Grey and stone 10% each ; Total bonus = 20% Bonus = 20% (Net income – Salary – Interest – Bonus) Bonus = .20 ($167,000 – $52,400 – $77,208 – Bonus) Bonus $6,232 Bonus per person = $6232/2 $3,116 Capital Account Balances—1/1/18 – 12/31/18 Gray Stone Lawson Monet Total Beginning contributions $245,440.64 $195,050.08 $82,561.28 $120,348 $643,400 Profit allocation (from above) $55,718.88 $47,592.01 $28,497.35 $35,191.76 $167,000 Drawing (10% of beginning balances) -$24,544.06 -$19,505.01 -$8,256.13 -$12,034.8 -$64,340 Ending balances $276,615.45 $223,137.08 $102,802.51 $143,504.96 $746,060 b) GRAY, STONE, AND LAWSON Statement of Partners\' Capital For Year Ending December 31, 2018 Gray Stone Lawson Monet Total Beginning contributions $245,440.64 $195,050.08 $82,561.28 $120,348 $643,400 Profit allocation (from above) $55,718.88 $47,592.01 $28,497.35 $35,191.76 $167,000 Drawing (10% of beginning balances) -$24,544.06 -$19,505.01 -$8,256.13 -$12,034.8 -$64,340 Ending balances $276,615.45 $223,137.08 $102,802.51 $143,504.96 $746,060