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 $330,000, $300,000, and $160,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations:

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

Profits and losses are allocated according to the following plan:

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 $9,200 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.

Determine the allocation of income for each of these three years.

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

	2016	2017	2018
Gray	1,840	3,000	2,000
Stone	1,560	1,700	1,700
Lawson	2,500	1,500	1,400
Monet	0	1,290	1,620

Solution

Allocation of income for year 2016:

Profit and Loss Appropriation A/c

for the year ended 31st December 2016

Amount

To interest on capital

Gray 19800

Stone 18000

Lawson 9600

47400

By balance b/d

To salary

Gray. 14720

Stone 12480

Lawson 20000

47200

To bonus

Gray. 18

Stone 18

36

To net profit transferred to

Gray. 121

Stone. 121

Lawson. 122

Total

364

95000

Total

95000

Profit and loss Appropriation A/c

For the year ended 31st December 2017

by net loss transferred to

Gray. 37315

Stone. 37316

Lawson 37316

Monet. 37316

149263

To interest on capital

Gray. 20451

Stone. 18037

Lawson. 10423

Money. 8152

57063

To Salary

Gray. 24000

Stone. 13600

Lawson . 12000

Monet. 9600

59200

Profit And loss Appropriation A/c

For the year ended 31st December 2018

To interest on capital

Gray. 18834

Stone. 15893

Lawson . 8487

Monet . 6163

49377

To salary

Gray. 16000

Stone. 13600

Lawson 11200

Monet. 12960

53760

To bonus

Gray. 3494

Stone. 3494

6988

To net profit transferred to

Gray. 17468

Stone. 17469

Lawson. 17469

Monet. 17468

Total

69875

=180000

Total

180000

Partners Capital A/c

For the year ended 31st December 2018

3494

Calculations of capital for the year ended 2016 and 2017

Contribution of Monet :-

20% of book value as on 1.1.2017:-

340859+300619+173722=815200*20/120=135867

Particular	Amount	Particular	Amount
To interest on capital Gray 19800 Stone 18000 Lawson 9600	47400	By balance b/d	95000
To salary Gray. 14720 Stone 12480 Lawson 20000	47200
To bonus Gray. 18 Stone 18	36
To net profit transferred to Gray. 121 Stone. 121 Lawson. 122 Total	364 95000	Total	95000