Reference no: EM133092330
Question - Lincoln and Thomas are engineers who practice in partnership under the name Lincoln and Thomas Associates & Company. The firm has been in operation for a number of years and is located at 75 Duncan Street. The partners share profit and losses in the ratio of 5:3.
Lincoln, the senior partner, provided the following information from the partnership records with notes for the year ended December 31, 2020: According to the Profit or Loss statement, the net profit from the partnership for the year ended December 31, 2020 was $95,600.
-Interest is to be charged on drawings at the agreed rate.
-Interest is to be paid on capital balances at the agreed rate.
-Lincoln is to be allowed a salary of $20,000 per year.
-Thomas is to be allowed a salary of $16,000 per year.
-The partners' capital account balances throughout the year were:
Lincoln $200,000
Thomas $120,000
-The balances on the partners' current accounts as at January 2020 were:
Lincoln $16,000 CR
Thomas $12,000 DR
During the year ended 31 December 2020 the following drawings were made:
Lincoln $38,000 on July 1, 2020
Thomas $50,00 on October 1, 2020
The following notes are relevant to the preparation of the partnership accounts for the year ended December 31, 2020.
Lincoln also attached the following abstract taken from the current Partnership Agreement:
The rate of interest, if any, to be paid on capital shall be 4% per annum.
The rate of interest, if any, to be charged on partners' drawings shall be 5%.
Salaries are to be paid to any partner as agreed and such annual sums shall be paid, provided the partner works in the business for a full year, otherwise payment shall be made pro-rata.
At the end of each accounting year the current account balances shall be cleared and such amounts are to be paid on the first day of the following month, provided the partner does not exercise an option to carry such funds forward to the new accounting year.
Performance related bonus shall be paid at the rate of 6% of the partnership net profit and shall be deducted before sharing the balance of profits.
Thomas exercised his option to take a sabbatical and left the practice July 1, 2020, for six months. Thomas is not expected to return to work before January 2, 2021.
At a performance evaluation meeting held December 30, 2020, it was agreed that Lincoln met the quantifiable objective of increasing fee income by 10% and is therefore entitled to be paid the performance related bonus on or before December 31, 2021.
Lincoln received payment of the bonus on December 30, 2020.
Required -
(a) Prepare the appropriation account for the year ended December 31, 2020.
(b) Prepare the current accounts for each partner as at December 31, 2020.
(c) Draft a brief memorandum to Lincoln and Thomas explaining the balance on his current account and advise him of his options with regard to the balance on the account.