Reference no: EM13376699
Gray, Stone, and Lawson open an accounting practice on January 1, 2011, in San Diego,California, to be operated as a partnership. Gray and Stone will serve as the senior partnersbecause of their years of experience. To establish the business, Gray, Stone, and Lawson contributecash and other properties valued at $210,000, $180,000, and $90,000, respectively. Articles of partnership agreement are 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 billablehour worked by that individual during the year.
(2) Interest is credited to the partners' capital accounts at the rate of 12 percent of theaverage monthly balance for the year (computed without regard for current income ordrawings).
(3) An annual bonus is to be credited to Gray and Stone. Each bonus is to be 10 percentof net income after subtracting the bonus, the salary allowance, and the interest. Alsoincluded in the agreement is the provision that the bonus cannot be a negative amount.
(4) Any remaining partnership profit or loss is to be divided evenly among all partners.Because of monetary problems encountered in getting the business started, Gray invests an additional$9,100 on May 1, 2011. On January 1, 2012, the partners allow Monet to buy into thepartnership. Monet contributes cash directly to the business in an amount equal to a 25 percentinterest 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 entranceinto the firm; the general provisions continue to be applicable.
The billable hours for the partners during the first three years of operation follow:
2011 2012 2013
Gray . . . . . . . . . . . . . . 1,710 1,800 1,880
Stone . . . . . . . . . . . . . 1,440 1,500 1,620
Lawson . . . . . . . . . . . 1,300 1,380 1,310
Monet . . . . . . . . . . . . -0- 1,190 1,580
The partnership reports net income for 2011 through 2013 as follows:
2011 . . . . . . . . . . . . . . . . . . . . . . $ 65,000
2012 . . . . . . . . . . . . . . . . . . . . . . (20,400)
2013 . . . . . . . . . . . . . . . . . . . . . . 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, 2013.