Question

Boswell and Johnson form a partnership on May 1, 2016. Boswell contributes cash of $67,000, Johnson conveys title to the following properties to the partnership: Book Value $ 23,500 43,500 Fair Value $ 45,000 53,000 Land Building and equipment The partners agree to start their partnership with equal capital balances. No goodwill is to be recognized. According to the articles of partnership written by the partners, profits and losses are allocated based on the following formula: • Boswell receives a compensation allowance of $1,500 per month • All remaining profits and losses are split 70:30 to Johnson and Boswell, respectively. • Each partner can make annual cash drawings of $6,000 beginning in 2017. Net Income of $19,500 is earned by the business during 2016. Walpole is Invited to join the partnership on January 1, 2017. Because of her business reputation and financial expertise, she is given a 40 percent Interest for $71,000 cash. The bonus approach is used to record this Investment, made directly to the business. The articles of partnership are amended to give Walpole a $3,000 compensation allowance per month and an annual cash drawing of $12,000. Remaining profits are now allocated: 52% Johnson Boswell Walpole All drawings are taken by the partners during 2017. At year-end, the partnership reports an earned net Income of $45,000. On January 1, 2018, Pope (previously a partnership employee) is admitted Into the partnership. Each partner transfers 10 percent to Pope, who makes the following payments directly to the partners: Johnson Boswell Walpole $ 9,019 11,046 12,798 Once again, the articles of partnership must be amended to allow for the entrance of the new partner. This change entitles Pope to a compensation allowance of $1,300 per month and an annual drawing of $5,000. Profits and losses are now assigned as follows: 41.0% 13.0 Johnson Boswell Walpole Pope 36. 10.0

Answer 1

ALLOCATION OF INCOME—2016 Johnson Salary for 8 months Remaining (19500 - 12000 ) = 7500 in 70:30 Totals Boswell 12000 2250 14250 Total 12000 7500 19500 5250 5250 STATEMENT OF PARTNERS' CAPITAL Boswell 82500 14250 Johnson 82500 Total 165000 Beginning Balances (67000 +45000+53000) Income allocation Drawings Ending balances 5250 19500 96750 87750 184500 WALPOLE INVESTMENT JANUARY 1, 2017 Walpole's 71,000 investment increases total capital to $255,500. Walpole is credited with a 40% interest or $102200. Therefore, the excess $31200 is a bonus from the original partners. Of this amount, $21840 is allocated from Johnson (70%) and $9360 from Boswell (30%).

ALLOCATION OF INCOME-2017 Johnson Salary Remaining (54000-45000 ) = 7500 in 18:42:40 Totals Boswell 18000 -1620 16380 Walpole 36000 -3600 32400 Total 54000 -9000 45000 -3780 -3780 STATEMENT OF PARTNERS' CAPITAL Walpole Beginning Balances Walpole's contribution Income allocation Drawings Ending balances Boswell 96750 -9360 16380 -6000 97770 Johnson 87750 -21840 -3780 -6000 56130 102200 32400 - 12000 122600 Total 184500 71000 45000 -24000 276500 ADMISSION OF POPE-JANUARY 1, 2018 Boswell, Capital Johnson Capital Walpole, Capital Pope, Capital 9777 5613 12260 27650

ALLOCATION OF INCOME—2018 Johnson Total 69600 Salary Remaining (70000 -69600 ) = 7500 in 13:41:36:11 Totals Boswell 18000 52 18052 Walpole 36000 144 36144 Pope 15600 40 15640 164 164 400 70000 STATEMENT OF PARTNERS' CAPITAL Pope Total 276500 Beginning Balances Admission of Pope Income allocation Drawings Ending balances Boswell 97770 -9777 18052 -6000 100045 Johnson 56130 -5613 164 -6000 44681 Walpole 122600 -12260 36144 -12000 134484 27650 15640 -5000 38290 70000 -29000 317500 100 102