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 $450,000, $420,000, and $210,000, 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:

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

2. 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).

3. 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.

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 $9,200 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:

2016 $98,000

2017 (44,400)

2018 236,000

Each partner withdraws the maximum allowable amount each year.

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

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

2016	2017	2018
Gray	2,020	4,200	2,130
Stone	1,680	2,300	1,860
Lawson	3,700	1,620	1,550
Monet	0	1,430	1,820
The partnership reports net income for 2016 through 2018 as follows: 2016 $98,000 2017 (44,400) 2018 236,000

Gay Shre, and Lav on ope anaco urt g prade on Jan ry 1 2016. nSan hop Caliv sa to be operated as a parte hpGray andSt ne w serve astesen patron be a ne ono yea sofo e Laenon conibte cash and ofher proper valued at 3450 000, 5420,000, and 5210,000, respecivly An aricles of parnershp agrment is dran up Ithas the tolliowing sipulations nce ?\'estate hthebeniess Gray. She aid Profits and lones are allocated acoording to the folowing pan 2 nturest is credited to te parners caphal accounts at he rafe of 12 percent of e average eod regard for urent income or drwing oss or Esalary and itres el in a negative mainder of net income to be distibuted The bilable hos for the patners deing he fent three years of opetion b Phepare in ap on a statement of partners capital tor the year ending Dmber 31 2

Solution

Req A 2016

Req 2017A

Req 2018A

2016
	Gray	Stone	Lawson	Total
Billable hours (A)	2,020	1,680	3,700	7,400
Rate per hour (B)	8	8	8	8
Salary allowance (C=A*B)	16,160	13,440	29,600	59,200
average monthly balance (D)	456,133	420,000	210,000	1,086,133
	(450000*4/12)+(459200*8/12)
Rate of Interest (\'E)	12%	12%	12%	12%
Interest (F=D*E)	54,736	50,400	25,200	130,336