Question

Question 2:                                                                                                           20 Marks

Lou Ross, Red Galley and Barbara Roberts formed the RGR Partnership on January 1, 2015. The partners invested assets and liabilities into the partnership as follows:

Fair

                                                                           Market Value

Lou Ross:

              Cash                                                           $   95,000

              Accounts Receivable                                    21,000

Red Galley:

              Cash                                                               120,000

              Vehicle                                                             19,000

              Loan payable (on the vehicle)                   10,000

Barbara Roberts:

              Cash                                                                 50,000

              Office equipment                                          90,000

The partnership earned a profit of $ 180,000 during this first year of operation.

Partners’ withdrawals for Ross, Galley, and Roberts amounted to $15,000, $20,000 and $23,000, respectively.

Required:

1. Prepare the journal entry to record the formation of the partnership.

2. Prepare a schedule to show the allocation of net income under the following plan for sharing profits and losses:

• Salary allowances of $ 35,000 to Lou Ross, $40,000 to Red Galley and $45,000 to Barbara Roberts,
• Interest allowances of 10% on initial capital investments,
• Any remaining balance to be shared in the ratio of 5:4:1 for Ross, Galley and Roberts respectively.

3. Prepare a statement of partners’ capital for the year ended December 31, 2015. (Don’t forget about the withdrawals.)

Question 2B

INCOME ALLOCATION	Ross	Galley	Roberts	Total
Net Profit				180,000
Salaries
Interest on Capital Invested (10%)
Total Salaries & Interest
Remaining profit to be allocated
Remaining profit allocated (5:4:1)
Income Allocation to Each Partner

Balance at beginning of year	0	0	0	0
Add:
Capital Invested
Net Income
Sub-total
Subtract
Withdrawals
Balance at end of year

Answer 1

1. Journal entry for formation of partnership
No	Particulars	Debit	Credit
1	Cash	95,000
	Account Receivable	21,000
	Lou Ross Capital Account		1,16,000
2	Cash	1,20,000
	Vehicle	19,000
	Loan Vehicle		10,000
	Red Gallery Capital Account		1,29,000
3	Cash	50,000
	Office Equipment	90,000
	Barbara Roberts Capital Account		1,40,000
2. Allocation of net income
Net Profit : 180,000
		Ross	Gallery	Roberts
	Salaries	35,000	40,000	45,000
	Interest on Capital	11,600	12,900	14,000
	(10% on Initial investment)
	Total Salaries and interest	46,600	52,900	59,000
	Remaining Profit
	(180,000 - 46,600-52,900-59,000)
	(21,500 in ratio of 5:4:1)	10,750	8,600	2,150
	Income allocation	57,350	61,500	61,150
3. Statement of partner's Capital
		Ross	Gallery	Roberts
	Beginning investment	-	-	-
	Add:
	Capital Invested	1,16,000	1,29,000	1,40,000
	Net Income	57,350	61,500	61,150
	Sub total	1,73,350	1,90,500	2,01,150
	Less:
	Withdrawals	15,000	20,000	23,000
	Balance end of year	1,58,350	1,70,500	1,78,150