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					Chapter 14 - Partnerships: Formation and Operations



                                                 CHAPTER 14
                      PARTNERSHIPS: FORMATION AND OPERATION

Chapter Outline

I.   Business organizations that are formed legally as partnerships, although they are not
     always as visible as corporations, still proliferate throughout this country especially in the
     legal, medical, and accounting professions.
     A. Advantages of the partnership format include ease of creation and the absence of the
         double taxation effect inherent to the income earned by a corporation and distributed to
         its owners.
     B. Partnerships, however, rarely grow to a significant size (when compared with large
         corporate organizations) primarily because of the unlimited liability being assumed by
         each general partner.
     C. Alternative legal formats have been created over the years to combine the benefits of
         corporations and partnerships such as S corporations, limited liability partnerships, and
         limited liability companies.

II. Partnership accounting and the capital accounts
    A. The distinctive aspects of partnership accounting center on the capital accounts
       maintained for each individual partner.
    B. The basis of accounting for these capital balances is the Articles of Partnership
       agreement which establishes provisions for initial investments, withdrawals, admission
       of a new partner, retirement of a partner, etc.
    C. The actual contribution made by the partners to the business should be recorded at fair
       market value. A problem arises, however, when a contribution is truly intangible such as
       a particular expertise or an established client base.
       1. In the bonus method, only identifiable assets are valued and recorded. The capital
           account balances are then aligned to indicate the percentage of the actual
           contributions being made by each partner.
       2. In the goodwill method, the amount being contributed and the corresponding
           percentage of the initial capital balance are used to calculate the value of the
           business and the presence of goodwill, a figure which is physically recorded as an
           intangible asset.

III. Partnership income allocation
     A. At the end of each fiscal period, the revenue and expense accounts must be closed out
        with the resulting income figure being assigned to the individual capital accounts.
     B. The method of allocating income to the capital accounts should be established within
        the Articles of Partnership.




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Chapter 14 - Partnerships: Formation and Operations




        1. The partners can simply assume an equal division of profits and losses.
        2. The partners, however, can select any method that is designed to arrive at an
           equitable allocation. Such factors as the amounts of capital invested, the time
           worked in the business, and the degree of business expertise may all serve to
           influence the assignment of income.

IV. Accounting for partnership dissolution
    A. Over time, the identity of the individuals within a partnership can change through
       admission of a new partner or the death, retirement, or withdrawal of a present partner.
    B. Each change in composition serves to dissolve the original partnership usually so that a
       new partnership can be formed to continue the business. Thus, dissolution does not
       necessarily affect the operations of the business.
    C. Admission of a new partner.
       1. A new partner will often buy all (or a portion) of the interest owned by one or more of
          the present partners.
          a. The capital account balances can simply be reclassified to reflect the identity of
              the new ownership.
          b. As an alternative, all accounts may be adjusted to fair market value with the price
              paid being used as the basis for calculating any goodwill.
       2. A new partner can also be admitted by a direct contribution to the partnership
          business.
          a. The bonus (or no revaluation) method records the identifiable assets being
              contributed at fair market value. The new partner’s capital is set equal to a
              prearranged percentage or amount. The remaining capital balances are then
              aligned based on profit and loss percentages.
          b. The goodwill (or revaluation) approach initially adjusts all assets and liabilities of
              the partnership to fair market value and records goodwill based on the amount
              being paid (which is used to calculate the implied value of the business).
    D. Withdrawal of a partner
       1. The final asset distribution to an individual should be based on the agreement
          established in the Articles of Partnership and will often vary in amount from that
          partner's ending capital balance.
       2. The difference between the amount paid and the final capital balance can simply be
          recorded as an adjustment to the remaining partners' capital accounts in the same
          manner as the bonus method.
       3. As an alternative, all accounts can be adjusted to fair value with the amount of
          payment being used as the basis for computing goodwill.




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Answers to Discussion Questions

What kind of business is this?

The owners of this business face a common problem: they began operations without seriously
considering the company’s legal form. The accountant now needs to specify the advantages
and disadvantages of the partnership versus corporate or some other legal form. Eventually,
the owners must make this decision but should consider all relevant factors in their choice.

The accountant should discuss the following issues with the two owners:

—Ease of formation. A formal partnership can be created by the writing of an Articles of
 Partnership. If income allocation and partners’ contributions are already determined, the
 document preparation should be relatively simple. Forming a corporation is a usually a more
 difficult task depending on individual state laws. The accountant should explain the specific
 procedures that apply to partnerships in the state where the business is organized and
 conducts its operations.

—Business liabilities. In a partnership, any partner may be held liable for all business debts.
 Thus, if liabilities escalate and the business fails, each partner risks a large possible loss.
 The same problem does not exist in a corporation where owners and the business are
 separate entities. For the owners, potential losses are, in corporations, normally limited to the
 amount being invested. However, in many small, newly created, corporations, the owners are
 required to personally guarantee any loans. Therefore, to an extent, the concept of unlimited
 liability may actually be present in either case. The partners should forecast the amount of
 debts that will be incurred and the possible outcome if the business would happen to fail.

—Lawsuits. Some businesses are more susceptible to lawsuits than others. A florist, for
 example, would likely have less risk than a pharmaceutical company. The concept of
 personal liability for business debts becomes especially important when litigation risk is high.
 To reduce such risk, creating a corporation to protect the personal property of the
 stockholders may be a wise move. The owners of a partnership may become personally
 responsible for losses created by a business mistake or accident. The need for this
 responsibility is recognized in states that prohibit doctors, lawyers, accountants, and the like
 from incorporating. Such states, however, allow licensed professionals to operate LLPs.

—Taxation. In a partnership, all income is allocated to the owners immediately and they are
 taxed on this amount. Double-taxation is avoided. A corporation pays an income tax and any
 dividends are then taxed again when collected by the owners. Therefore, traditionally,
 partnerships are viewed as having a tax advantage. The accountant should also mention to
 the partners other possible tax factors that may affect their decision. For example, in small
 corporations, double taxation may not be a problem. If salaries paid to the owners are
 reasonable and approximate the company's profits so that no dividends are distributed, only
 one tax is paid in either case. As another issue, if a partnership suffers a loss (which often
 happens when companies begin operations), that loss is passed to the partners and can be
 used to reduce other taxable income. However, in a corporation, losses are carried back and
 forward to reduce other taxable income that is earned by the business, possibly delaying the
 benefits of the loss. As mentioned in the textbook, the owners should consider forming an S
 Corporation—a business that is incorporated but still taxed as a partnership.



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—Bankruptcy. If the business should ever fail and have to be liquidated, losses of a partnership
 are passed directly to the owners to reduce taxable income immediately. For a corporation,
 the loss is a capital loss to the stockholders which can only offset their own capital gains or
 be deducted at the rate of $3,000 per year. Thus, if a large loss is incurred, the tax benefits
 may not be realized for years into the future.

—Growth potential. Traditionally, corporations have more growth potential than do partnerships.
 Ownership interests can be easily transferred. The limitation on liability encourages
 ownership by individuals who cannot participate in the management of the company.
 Partnerships are more restricted in adding new owners. Partnerships usually have to entice
 individuals who are willing to work in the business in order to obtain additional capital.

   Therefore, the accountant may want to address the following questions in advising these
   clients:
         What amount of time and energy is involved in becoming incorporated?
         How much profit or loss is anticipated from the operations of this business in the
            foreseeable future?
         How much debt will the new business incur?
         Will this debt be guaranteed by the owners?
         How much salary do the owners anticipate withdrawing from the business?
         What are the chances of incurring lawsuits?
         What is the possibility that the business will fail?
         How large do the owners expect this business to grow? Do they anticipate the need
            for new owners and new capital?
         Does the creation of an S Corporation apply to this particular business?

How Will the Profits Be Split?

This case is designed to point up the difficulty of designing a profit-sharing arrangement that is
fair to all parties. Currently, these three individuals have incomes totaling an amount in excess
of the first year income that is expected. Thus, the adopted plan will have an immediate impact
on them. The reduction of income must be absorbed by the partners in some equitable manner.
In addition, the income is projected to increase relatively fast so that the agreed-upon method
needs to reward all participants properly over time.

Dewars has built up the firm and still handles the bigger clients although he plans to reduce his
workload over the next few years. Thus, one method of compensation would be to credit him
with interest on the capital built up in the business. However, if that number alone is used, it will
tend to escalate even if his work hours are reduced. For this reason, Dewars' share of the
profits could also be based in some way on the number of hours that he works. According to
the information presented, this number will probably shrink over the years, reducing the profits
allocated to Dewars. Thus, this partner might be given interest equal to 10 percent of his capital
balance and $50 for each hour worked.

Huffman is contributing a significant number of hours to the firm but tends to work on the
smaller jobs. A possible allocation technique would be to give this partner a per hour allocation
but one that is somewhat smaller than Dewars. For example, Huffman could receive an income
allocation of $30 per hour to begin. That number could then be programmed to escalate over
the years as Huffman starts to take over the bigger jobs.


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Scriba's role is to develop a tax practice within the firm. Consequently, one suggestion would be
to credit her capital account with a percentage of the tax revenues (20 percent, for example)
each year. In that way, she benefits by the amount of business that she is able to bring to the
organization. During the first years, though, she may have trouble getting the new part of this
business to generate significant revenues. Thus, the partners may want to set a minimum figure
for her income allocation. She could be credited, as an example, with 20 percent of tax
revenues but not less than $50,000.

Many answers to this question are possible. The above is just a simple suggestion based on
the facts presented in the case. Income allocation techniques are usually designed to reward
the partners for the attributes that they bring to the organization. Even with the above system,
percentages would still be necessary to assign any remaining profit or loss. If the partners are
not totally satisfied with the system as designed, the percentages could be weighted or adjusted
to reward any partner not being properly compensated.




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Answers to Questions

1. The advantages of operating a business as a partnership include the ease of formation and
   the avoidance of the double taxation effect that inherently reduces the profits distributed to
   the owners of a corporation. In addition, Because the losses of a partnership pass, for tax
   purposes, directly through to the owners, partnerships have historically been used
   (especially in certain industries) to reduce or defer income taxes.

    Several disadvantages also accrue from the partnership format. Each general partner, for
    example, has unlimited liability for all debts of the business. This potential liability can be
    especially significant in light of the concept of mutual agency, the right that each partner has
    to create liabilities in the name of the partnership. Because of the risks created by unlimited
    liability and mutual agency, the growth potential of most partnerships is severely limited.
    Few people are willing to become general partners in an organization unless they can
    maintain some day-to-day contact and control over the business.

    Further discussion of these issues can be found in the Answer to the first Discussion
    Question that appears above.

2. Specific partnership accounting problems center in the equity (or capital) section of the
   balance sheet. In a corporation, stockholders' equity is divided between earned capital and
   contributed capital. Conversely, for a partnership, each partner has an individual capital
   account that is not differentiated according to its sources. Virtually all accounting issues
   encountered purely in connection with the partnership format are related to recording and
   maintaining these capital balances.

3. The balance in each partner's capital account measures that partner's interest in the book
   value of the business’ net assets. This figure arises from contributions, earnings, drawings,
   and other capital transactions.

4. A Subchapter S corporation is formed legally as a corporation so that its owners enjoy
   limited legal liability and easy transferability of ownership. However, if a company qualifies
   and becomes a Subchapter S Corporation, it will be taxed in virtually the same manner as a
   partnership. Hence, income will be taxed only once and that is to the owners at the time that
   it is earned by the corporation.

    Use of this designation is quite restricted. To qualify as a Subchapter S Corporation, a
    company can only have one class of stock and must have no more than 100 owners. These
    owners can only be individuals, estates, certain tax-exempt entities, and certain types of
    trusts. Most corporations that do not qualify as Subchapter S Corporations are automatically
    Subchapter C Corporations. These entities are also corporations but they pay income taxes
    when the income is earned. Additionally, the owners are liable for a second income tax
    when dividends are distributed to them. Thus, the income earned by a Subchapter C
    Corporation faces the double taxation effect commonly associated with corporations.




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5. In a general partnership, each partner can have unlimited liability for the debts of the
   business. Therefore, a partner may face a significant risk, especially in connection with the
   actions and activities of other partners. However, general partnerships are easy to form and
   often serve well in smaller businesses where all partners know each other. The major
   advantage of a general partnership is that all income earned by the business is only taxed
   once when earned by the business so that no second tax is incurred when distributions are
   made to owners.

    A limited liability partnership (LLP) is very similar to a general partnership except in the
    method by which a partner’s liability is measured. In an LLP, the partners can still lose their
    entire investment and be held responsible for all contractual debts of the business such as
    loans. However, partners cannot be held responsible for damages caused by other
    partners. For example, if one partner carelessly causes damage and is sued, the other
    partners are not held responsible.

    A limited liability company can now be created in certain situations. This type of organization
    is classified as a partnership for tax purposes so that the double-taxation effect is avoided.
    However, the liability of the owners is limited to their individual investments like a
    Subchapter C Corporation. Depending on state law, the number of owners is not restricted
    in the same manner as a Subchapter S Corporation so that there is a greater potential for
    growth.

6. The Articles of Partnership is a legal agreement that should be created as a prerequisite for
   the formation of a partnership. This document defines the rights and responsibilities of the
   partners in relation to the business and in relation to each other. Thus, it serves as a
   governing document for the partnership. The Articles of Partnership may contain any
   number of provisions but should normally specify each of the following:

    a. Name and address of each partner
    b. Business location
    c. Description of the nature of the business
    d. Rights and responsibilities of each partner
    e. Initial investment to be made by each partner along with the method to be used for
       valuation
    f. Specific method by which profits and losses are to be allocated
    g. Periodic withdrawals to be allowed each partner
    h. Procedure for admitting new partners
    i. Method for arbitrating partnership disputes
    j. Method for settling a partner's share in the business upon withdrawal, retirement, or
       death

7. To give fair recognition to noncash contributions, all assets donated by the partners (such
   as land or inventory) should be recorded by the partnership at their fair values at the date of
   investment. However, for taxation purposes, the partner’s book value is retained.

8. In forming a partnership, one or more of the partners may be contributing some factor (such
   as an established clientele or an expertise) which is not viewed normally as an asset in the
   traditional accounting sense. In effect, the partner will be receiving a larger capital balance
   than the identifiable contributions would warrant.



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9.

     The bonus method of recording this transaction is to value and record only the identifiable
     assets such as land and buildings. The capital accounts are then aligned to recognize the
     proportionate interest being assigned to each partner's investment. If, for example, the
     capital balances are to be equal, they are set at identical amounts that correspond in total to
     the value of the identifiable assets.

     As an alternative, the amounts contributed along with the established capital percentages
     can be used to determine mathematically the implied total value of the business and the
     presence of any goodwill brought into the business. This goodwill is recognized at the time
     that the partnership is created so that the amount can be credited to the appropriate
     partner.

10. The Drawing account measures the amount of assets that a particular partner takes from
    the business during the current period. Often, only regularly allowed distributions are
    recorded in the Drawing account with larger, more sporadic withdrawals being recorded as
    direct reductions to the partner's capital balance.

11. At the end of each fiscal year, when revenues and expenses are closed out, some
    assignment must be made of the resulting income figure Because a partnership will have
    two or more capital accounts rather than a single retained earnings balance. This allocation
    to the capital accounts is based on the agreement established by the partners preferably as
    a part of the Articles of Partnership.

12. The allocation process can be based on any number of factors. The actual assignment of
    income should be designed to give fair and equitable treatment to each of the partners.
    Often, an interest factor is used to reward the capital investment of the partners. A salary
    allowance is utilized as a means of recognizing the amount of time worked by an individual
    or a certain degree of business expertise. The allocation process can be further refined by a
    ratio that is either divided evenly among the partners or weighted in favor of one or more
    members.

13. If agreement as to the allocation of income has not been specified, an equal division among
    all partners is presumed. If an agreement has been reached for assigning profits but no
    mention is made concerning losses, the assumption is made that the same method is
    intended in either case.

14. The dissolution of a partnership is the breakup or cessation of the partnership. Many
    reasons can exist for a partnership to dissolve. One partner may withdraw, retire, or die. A
    new partner may be admitted to the partnership. The original partnership terminates
    whenever the identity of the individuals serving as partners has changed.

     Dissolution, however, does not necessarily lead to the liquidation of the business. In most
     cases, but not all, a new partnership is formed which takes over the business. Such
     dissolutions are no more than changes in the composition of the ownership and should not
     affect operations.




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15. A new partner can join a partnership by acquiring part or all of the interest of one or more of
    the present partners. This transaction is carried out with the individual partners directly and
    not with the partnership. A new partner may also enter through a contribution to the
    business. In such cases, the investment is made to the partnership rather than to the
    individuals.

16. In selling an interest in a partnership, three rights are conveyed to the new owner:

    a. The right of co-ownership of the business property;
    b. The right to a specified allocation of profits and losses generated by the partnership's
       business; and
    c. The right to participate in the management of the business.

    No problem exists in selling or assigning the first two of these rights. However, the right to
    participate in management decisions can only be transferred with the consent of all
    partners.

17. Any goodwill being recognized in a capital transaction that is allocated to the original
    partners is based on the profit and loss ratio. The amount is assumed to represent
    unrealized gains in the value of the business. To determine the amount of goodwill, the
    implied value of the business as a whole must be calculated based on the price being paid
    for a portion by the new partner. The difference between this implied value and the total
    capital is assumed to be goodwill or some other adjustment to asset value.

18. Allocating goodwill to an entering partner may be necessary for several reasons. One of the
    most common is that the partner is bringing to the partnership an attribute that is not an
    asset in the traditional accounting sense. For example, a new partner with an excellent
    business reputation might be credited with goodwill at the time of entrance. Other factors
    such as an established clientele or a professional expertise can justify attributing goodwill to
    the new partner. The partnership might make this same concession to an entering partner if
    cash is urgently needed by the business and a larger share of the capital has to be offered
    as an enticement to generate the new investment.

19. Book values in most cases measure historical cost expenditures which often have
    undergone years of allocation and changes in value. For this reason, book value will
    frequently fail to mirror or even resemble the actual worth of a business. In addition, the
    goodwill that is assumed to be present in a business as a going concern is not a factor that
    is always reflected within book values. Therefore, distributing partnership property to a
    withdrawing partner based on book value would not necessarily be fair. Hence, the Articles
    of Partnership should spell out a method by which an equitable settlement can be achieved.




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Answers to Problems

1. B

2. C

3. D

4. C Mary Ann's investment equals 1/3 of total capital ($50,000 ÷ $150,000).
     However, she receives only a 1/4 interest capital balance. One explanation
     for the difference is that the business assets are worth more than book
     value. To achieve agreement, the net assets could be valued upward to fair
     value with the adjustment credited to the original partners’ capital
     accounts. Alternatively, a bonus could be credited to the original partners.

5. D The company’s implied value based on the new contribution is $233,333
     ($70,000 ÷ 30%) which is less than the capital balances ($280,000 in original
     capital plus $70,000 to be invested). Thus, either the assets are overvalued
     or the new partner is also contributing goodwill. Because the problem
     indicates that goodwill is recognized, that figure must be computed. Note
     that the $70,000 is going into the business and, thus, increases capital.

          Danville's investment           =   30% (Original capital plus Danville's investment)
             $70,000 + Goodwill           =   .30 ($280,000 + $70,000 + Goodwill)
             $70,000 + Goodwill           =   $105,000 + .30 Goodwill
                   .70 Goodwill           =   $35,000
                       Goodwill           =   $50,000
 Danville's investment (Capital)          =   $70,000 + $50,000 = $120,000

6. C The implied value of the company is $800,000 ($200,000 ÷ 25%). Because
     the current capital total is only $600,000, goodwill of $200,000 must be
     recognized. Oscar's investment is going to the partners so that it does not
     affect the capital total directly. Of the $200,000 in goodwill, 30 percent or
     $60,000 is attributed to Jethro which brings that capital balance to
     $260,000. Because a 25% interest is conveyed to the new partner, Jethro's
     balance decreases by 25% or $65,000—a drop to $195,000.

7. B Total capital is $200,000 ($110,000 + $40,000 + $50,000) after the new
     investment. As Kansas's portion is 30 percent, the capital balance
     becomes $60,000 ($200,000 × 30%). Because only $50,000 was paid, a
     bonus of $10,000 is taken from the two original partners based on their
     profit and loss ratios: Bolcar – $7,000 (70%) and Neary – $3,000 (30%). The
     reduction drops Neary's capital balance from $40,000 to $37,000.




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8. B Total capital is $270,000 ($120,000 + $90,000 + $60,000) after the new
     investment. However, the implied value of the business based on the new
     investment is $300,000 ($60,000 ÷ 20%). Thus, goodwill of $30,000 must be
     recognized with the offsetting allocation to the original partners based on
     their profit and loss ratio: Bishop – $18,000 (60%) and Cotton $12,000
     (40%). The increase raises Cotton's capital from $90,000 to $102,000.

9. A Total capital is $450,000 ($210,000 + $140,000 + $100,000) after the new
     investment. As Claudius' portion is to be 20 percent, the new capital
     balance would be $90,000 ($450,000 × 20%). Because $100,000 was paid, a
     bonus of $10,000 is being given to the two original partners based on their
     profit and loss ratio: Messalina – $6,000 (60%) and Romulus – $4,000 (40%).
     The increase raises Messalina's capital balance from $210,000 to $216,000
     and Romulus's capital balance from $140,000 to $144,000.

10. D ASSIGNMENT OF INCOME
                                                      ARTHUR       BAXTER      CARTWRIGHT    TOTAL
    Interest—10% of
       beginning capital ..............               $ 6,000      $ 8,000       $10,000    $24,000
    Salary .......................................                  20,000                   20,000
    Allocation of remaining income
    ($6,000 divided on a 3:3:4 basis)                   1,800        1,800         2,400      6,000
          Totals ...........................          $ 7,800      $29,800       $12,400    $50,000

    STATEMENT OF CAPITAL
                                                      ARTHUR       BAXTER      CARTWRIGHT    TOTAL
    Beginning capital ...................             $60,000      $80,000      $100,000 $240,000
    Net income (above) ................                 7,800       29,800        12,400   50,000
    Drawings (given) ....................              (5,000)      (5,000)       (5,000) (15,000)
    Ending capital ........................           $62,800     $104,800      $107,400 $275,000

11. A ASSIGNMENT OF INCOME—YEAR ONE
                                                     WINSTON       DURHAM         SALEM      TOTAL
    Interest—10% of
       beginning capital ..............            $11,000         $ 8,000       $11,000    $30,000
    Salary .......................................  20,000              -0-       10,000     30,000
    Allocation of remaining loss
    ($80,000 divided on a 5:2:3 basis) (40,000)                     (16,000)      (24,000) (80,000)
          Totals ...........................       $(9,000)        $ (8,000)     $ (3,000) $(20,000)

    STATEMENT OF CAPITAL—YEAR ONE
                                                     WINSTON      DURHAM          SALEM      TOTAL
    Beginning capital ...................            $110,000      $80,000      $110,000 $300,000
    Net loss (above) .....................              (9,000)     (8,000)        (3,000) (20,000)
    Drawings (given) ....................              (10,000)    (10,000)       (10,000) (30,000)
       Ending capital ...................             $ 91,000     $62,000       $ 97,000 $250,000

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11. (continued)

    ASSIGNMENT OF INCOME—YEAR TWO
                                                WINSTON        DURHAM       SALEM     TOTAL
    Interest—10% of
       beginning capital ..............             $ 9,100    $ 6,200     $ 9,700   $25,000
    Salary .......................................   20,000         -0-     10,000    30,000
    Allocation of remaining loss
    ($15,000 divided on a 5:2:3 basis)               (7,500)    (3,000)     (4,500) (15,000)
          Totals ...........................       $21,600      $3,200     $15,200 $ 40,000

    STATEMENT OF CAPITAL—YEAR TWO
                                                WINSTON        DURHAM       SALEM     TOTAL
    Beginning capital (above) .....              $ 91,000      $62,000     $ 97,000 $250,000
    Net income (above) ................            21,600        3,200       15,200   40,000
    Drawings (given) ....................         (10,000)     (10,000)     (10,000) (30,000)
       Ending capital ...................       $102,600       $55,200    $102,200 $260,000

12. A A $10,000 bonus is paid to Costello ($100,000 is paid rather than the
      $90,000 capital balance). This bonus is deducted from the two remaining
      partners according to their profit and loss ratio (2:3). A reduction of 60
      percent (3/5) is assigned to Burns or a decrease of $6,000 which drops that
      partner’s capital balance from $30,000 to $24,000.

13. D Craig receives an additional $10,000. Because Craig receives 20 percent of
      profits and losses, this allocation indicates total goodwill of $50,000.
             20% of Goodwill = $10,000
             Goodwill = $10,000 ÷ .20 = $50,000

        Goodwill                                 50,000
          Montana, Capital (30%)                           15,000
          Rice, Capital (30%)                              15,000
          Craig, Capital (20%)                             10,000
          Taylor, Capital (20%)                            10,000

        The above entry raises Montana’s capital balance from $130,000 to
        $145,000.

14. A The implied value of the company is $900,000 ($270,000 ÷ 30%). Because
      the money is going to the partners rather than into the business, the capital
      total is $490,000 before realigning the balances. Hence, goodwill of
      $410,000 is recognized based on the implied value ($900,000 – $490,000).
      This goodwill is assumed to represent unrealized business gains and is
      attributed to the original partners according to their profit and loss ratio.
      They will then each convey 30 percent ownership of the $900,000
      partnership to Darrow for a capital balance of $270,000.

                                                  14-12
Chapter 14 - Partnerships: Formation and Operations


15. D Because the money goes into the business, total capital becomes $740,000
      ($490,000 + $250,000). Darrow is allotted 30 percent of this total or
      $222,000. Because Darrow invested $250,000, the extra $28,000 is assumed
      to be a bonus to the original partners. Jennings will be assigned 40 percent
      of this extra amount or $11,200. This bonus increases Jennings’ capital
      from $160,000 to $171,200.

16. (10 Minutes) (Compute capital balances under both goodwill and bonus
    methods)

a. Goodwill Method
   Implied value of partnership ($80,000 ÷ 40%) ..............                           $200,000
   Total capital after investment ($70,000 + $40,000 + $80,000)                           190,000
   Goodwill ..........................................................................   $ 10,000

    Goodwill to Hamlet (7/10) ..............................................             $   7,000

    Goodwill to MacBeth (3/10) ...........................................               $ 3,000

    Hamlet, capital (original balance plus goodwill) .........                           $ 77,000

    MacBeth, capital (original balance plus goodwill) ......                             $ 43,000

    Lear, capital (payment) (40% of total capital) ..............                        $ 80,000

b. Bonus Method
   Total capital after investment ($70,000 + 40,000 + $80,000)                           $190,000
   Ownership portion—Lear ..............................................                     40%
   Lear, capital ....................................................................    $ 76,000

    Bonus payment made by Lear ($80,000 – $76,000) ......                                $   4,000

    Bonus to Hamlet (7/10) ..................................................            $   2,800

    Bonus to MacBeth (3/10) ...............................................              $   1,200

    Hamlet, capital (original balance plus bonus) .............                          $ 72,800

    MacBeth, capital (original balance plus bonus) ..........                            $ 41,200

    Lear, capital (40% of total capital) ................................                $ 76,000




                                                      14-13
Chapter 14 - Partnerships: Formation and Operations


17. (15 Minutes) (Prepare journal entries to record admission of new partner under
     both the goodwill and the bonus methods)

    Part a.
       Total capital is $300,000 ($85,000 + $60,000 + $55,000 + $100,000) after the
       new investment. As Sergio's portion is 25 percent, this partner's capital
       balance would be $75,000. Because $100,000 was paid, a bonus of $25,000
       is given to the three original partners based on their profit and loss ratio:
       Tiger—$12,500 (50%), Phil—$7,500 (30%), and Ernie—$5,000 (20%).

        Cash ..........................................................................    100,000
          Sergio, Capital .....................................................                      75,000
          Tiger, Capital .......................................................                     12,500
          Phil, Capital ..........................................................                    7,500
          Ernie, Capital .......................................................                      5,000

    Part b.
       Total capital is $260,000 ($85,000 + $60,000 + $55,000 + $60,000) after the
       new investment. As Sergio's portion is 25 percent, this partner's capital
       balance is $65,000. Because only $60,000 was paid, a bonus of $5,000 is
       taken from the three original partners based on their profit and loss ratio:
       Tiger—$2,500 (50%), Phil—$1,500 (30%), and Ernie—$1,000 (20%).

        Cash ..........................................................................     60,000
        Tiger, Capital .............................................................         2,500
        Phil, Capital ...............................................................        1,500
        Ernie, Capital ............................................................          1,000
           Sergio, Capital .....................................................                     65,000

    Part c.
       Total capital is $272,000 ($85,000 + $60,000 + $55,000 + $72,000) after the
       new investment. However, the implied value of the business based on the
       new investment is $288,000 ($72,000 ÷ 25%). Consequently, goodwill of
       $16,000 must be recognized with the offsetting allocation to the original
       partners based on their profit and loss ratio: Tiger—$8,000 (50%), Phil—
       $4,800 (30%), and Ernie—$3,200 (20%).

        Goodwill ...................................................................        16,000
          Tiger, Capital .......................................................                      8,000
          Phil, Capital ..........................................................                    4,800
          Ernie, Capital .......................................................                      3,200
        Cash ...........................................................................    72,000
          Sergio, Capital .....................................................                      72,000




                                                            14-14
Chapter 14 - Partnerships: Formation and Operations


18. (16 Minutes) (Determine capital balances after admission of new partner using
   both goodwill and bonus methods)

    Part a.
       Total capital is $490,000 ($200,000 + $120,000 + $90,000 + $80,000) after the
       new investment. However, the implied value of the business based on the
       new investment is only $444,444 ($80,000 ÷ 18%). According to the goodwill
       method, this situation indicates that the new partner must be bringing
       some intangible attribute to the partnership other than just cash. This
       contribution must be computed algebraically and is recorded as goodwill
       to the new partner.

            G's Investment = .18 ($200,000 + $120,000 + $90,000 + G's Investment)
            $80,000 + Goodwill = .18 ($410,000 + $80,000 + Goodwill)
            $80,000 + Goodwill = $88,200 + .18 Goodwill
            .82 Goodwill = $8,200
            Goodwill = $10,000

        The above goodwill balance indicates that Grant's total investment is
        $90,000 (cash of $80,000 and goodwill of $10,000). A $90,000 contribution
        raises the total capital to $500,000 so that Grant does, indeed, have an 18
        percent interest ($90,000 ÷ $500,000).

        CAPITAL BALANCES:
          Nixon ....................................................................               $200,000
          Hoover ..................................................................                 120,000
          Polk ....................................................................                  90,000
          Grant ....................................................................                 90,000

    Part b.
       Total capital is $510,000 ($200,000 + $120,000 + $90,000 + $100,000) after
       the new investment. As Grant's portion is to be 20 percent, this partner's
       capital balance will be $102,000. Because only $100,000 was paid, a bonus
       of $2,000 is taken from the three original partners based on their profit and
       loss ratio: Nixon—$1,000 (50%), Hoover—$400 (20%), and Polk—$600
       (30%).

        CAPITAL BALANCES
                                            Original         Investment                Bonus       Total
        Nixon ....................       $200,000                                  $(1,000)    $199,000
        Hoover ..................         120,000                                    ( 400)     119,600
        Polk .......................       90,000                                    ( 600)      89,400
        Grant .....................            -0-             100,000               2,000      102,000
           Total ................                                                              $510,000



                                                         14-15
Chapter 14 - Partnerships: Formation and Operations


19. (8 Minutes) (Record admission of new partner and allocation of new income)

    Part a.
       Total capital is $336,000 ($150,000 + $110,000 + $76,000) after the new
       investment. However, the implied value of the business based on the new
       investment is $380,000 ($76,000 ÷ 20%). Consequently, goodwill of $44,000
       must be recognized with the offsetting allocation to the original two
       partners based on their profit and loss ratio: Com—$26,400 (60%) and
       Pack—$17,600 (40%).

             Goodwill ................................................................       44,000
               Com, Capital ...................................................                         26,400
               Pack, Capital ..................................................                         17,600
             Cash ....................................................................       76,000
               Hal, Capital .....................................................                       76,000

Part b.

                                                          Com               Pack                Hal      Total
    Interest ..................................        $17,640            $12,760            $7,600    $38,000
    Remaining loss .....................                (1,000)              (600)             (400)    (2,000)
       Income allocation ...........                   $16,640            $12,160            $7,200    $36,000



20. (5 Minutes) (Allocation of income to partners)

                                           Jones                             King          Lane          Total
    Bonus (20%) ......................... $18,000                         $    -0-       $    -0-      $18,000
    Interest (15% of average capital) 15,000                               30,000         45,000        90,000
    Remaining loss ($18,000) ...           (6,000)                         (6,000)        (6,000)      (18,000)
    Income assignment .............       $27,000                         $24,000        $39,000       $90,000




                                                          14-16
Chapter 14 - Partnerships: Formation and Operations


21. (15 Minutes) (Allocate income and determine capital balances)

    ALLOCATION OF INCOME
                                                       Purkerson           Smith              Traynor     Totals
    Interest (10%)                                       $ 6,600 (below) $ 4,000               $ 2,000   $12,600
    Salary                                                18,000          25,000                 8,000    51,000
    Remaining income (loss):
               $ 23,600
                (12,600)
                (51,000)
              $(40,000)                                   (16,000)               (8,000)      (16,000)   (40,000)

         Totals                                           $ 8,600             $21,000         $(6,000)   $23,600

    CALCULATION OF PURKERSON'S INTEREST ALLOCATION

    Balance, January 1—April 1 ($60,000 × 3)                                                 $180,000
    Balance, April 1—December 31 ($68,000 × 9)                                                 612,000
    Total ................................................................................   $792,000
    Months .............................................................................           12
    Average monthly capital balance .................................                         $ 66,000
    Interest rate ....................................................................          × 10%
    Interest allocation (above) ............................................                  $ 6,600

                                  STATEMENT OF PARTNERS' CAPITAL
                                                        Purkerson                 Smith        Traynor     Totals
    Beginning balances ..............                     $60,000             $40,000         $20,000 $120,000
    Additional contribution .........                       8,000                  -0-              -0-   8,000
    Income (above) ......................                   8,600              21,000           (6,000)  23,600
    Drawings ($1,000 per month)                           (12,000)            (12,000)        (12,000)  (36,000)
    Ending capital balances ........                      $64,600             $49,000          $ 2,000 $115,600




                                                             14-17
Chapter 14 - Partnerships: Formation and Operations


22. (30 Minutes) (Allocate income for several years and determine ending capital
    balances)

                                    INCOME ALLOCATION—2010

                                          Left              Center       Right       Total
    Interest (12% of beginning capital) $2,400              $ 7,200    $ 6,000    $ 15,600
    Salary                              12,000                8,000         -0-     20,000
    Remaining income/loss:
            $(30,000)
              (15,600)
              (20,000)
            $(65,600)                 (19,680)              (32,800)   (13,120)  (65,600)
                    Totals            $(5,280)             $(17,600)   $(7,120) $(30,000)

               STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2010

                                                  Left      Center       Right    Total
    Beginning balances ...........             $20,000     $60,000     $50,000 $130,000
    Income allocation ..............            (5,280)    (17,600)     (7,120) (30,000)
    Drawings .............................     (10,000)    (10,000)    (10,000) (30,000)
       Ending balances ...........             $ 4,720     $32,400     $32,880 $ 70,000

                                      INCOME ALLOCATION—2011
                                                Left    Center           Right       Total
    Interest(12% of beginning capital above) *$566      $3,888          $3,946     $ 8,400
    Salary .................................    12,000   8,000              -0-     20,000
    Remaining income/loss:
             $20,000
              (8,400)
             (20,000)
             $(8,400)                           (2,520) (4,200)         (1,680)    (8,400)
                Totals..................       $10,046  $7,688          $2,266    $20,000
    *Rounded

               STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2011

                                                   Left     Center       Right      Total
    Beginning balances (above)                  $ 4,720    $32,400     $32,880    $70,000
    Additional investment ........                   -0-        -0-     12,000     12,000
    Income allocation ..............             10,046      7,688       2,266     20,000
    Drawings .............................      (10,000)   (10,000)    (10,000)   (30,000)
       Ending balances ...........              $ 4,766    $30,088     $37,146    $72,000




                                                  14-18
Chapter 14 - Partnerships: Formation and Operations


22. (continued)
                                      INCOME ALLOCATION—2012
                                                 Left   Center     Right      Total
    Interest (12% of beginning capital
       above)* ...........................      $ 572   $ 3,611   $4,457    $ 8,640
    Salary ..................................  12,000     8,000       -0-    20,000
    Remaining income:
         $40,000
           (8,640)
          (20,000)
         $11,360 ........................       2,272     4,544    4,544     11,360
           Totals ........................    $14,844  $16,155    $9,001    $40,000

*Rounded

           STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2012
                                   Left   Center    Right     Total
    Beginning balances (above)  $ 4,766  $30,088  $37,146  $72,000
    Income allocation            14,844   16,155    9,001    40,000
    Drawings                    (10,000) (10,000) (10,000)  (30,000)
       Ending balances         $ 9,610   $36,243  $36,147  $82,000




                                                  14-19
Chapter 14 - Partnerships: Formation and Operations


23. (12 Minutes) (Determine capital balances after retirement of a partner using
    both the goodwill and the bonus approaches)

    a. Harrison receives an additional $30,000 about the capital balance. Because
       Harrison is assigned 20 percent of all profits and losses, this extra
       allocation indicates total goodwill of $150,000, which must be split among
       all partners.

        20% of Goodwill = $30,000
        .20 G = $30,000
        G = $150,000

                        CAPITAL BALANCES AFTER WITHDRAWAL
                       Original Balance        Goodwill   Withdrawal Final Balance
            Lennon           $230,000          $45,000                  $275,000
            McCartney         190,000           45,000                   235,000
            Harrison          160,000           30,000    $(190,000)          -0-
            Starr             140,000           30,000                   170,000
               Total                                                    $680,000

b. A $50,000 bonus is paid to Lennon ($280,000 is paid rather than the $230,000
   capital balance). This bonus is deducted from the three remaining partners
   according to their relative profit and loss ratio (3:2:1). A reduction of 50
   percent (3/6) is assigned to McCartney or a decrease of $25,000 which drops
   this partner's capital balance from $190,000 to $165,000. A reduction of 33.3
   percent (2/6) is assigned to Harrison or a decrease of $16,667 which drops this
   partner's capital balance from $160,000 to $143,333. A reduction of 16.7
   percent (1/6) is assigned to Starr or a decrease of $8,333 which drops this
   partner's capital balance from $140,000 to $131,667.




                                                  14-20
Chapter 14 - Partnerships: Formation and Operations


24. (45 Minutes) (Discussion of P&L allocations and admission of a new partner)

    a. The interest factor was probably inserted to reward Page for contributing
       $50,000 more to the partnership than Childers. The salary allowance gives
       an additional $15,000 to Childers in recognition of the full-time (rather than
       part-time) employment. The 40:60 split of the remaining income was
       probably negotiated by the partners based on other factors such as
       business experience, reputation, etc.

    b. The drawings show the assets removed by a partner during a period of
       time. A salary allowance is added to each partner's capital for the year
       (usually in recognition of work done) and is a component of net income
       allocation. The two numbers are often designed to be equal but agreement
       is not necessary. For example, a salary allowance might be high to
       recognize work contributed by one partner. The allowance increases the
       appropriate capital balance. The partner might, though, remove little or no
       money so that the partnership could maintain its liquidity.

    c. Page, Drawings ......................................................... 5,000
          Repair Expense ...................................................                     5,000
       (To reclassify payment made to repair personal residence.)
        Page, Capital .............................................................    13,000
        Childers, Capital .......................................................      11,000
           Page, Drawings (adjusted) .................................                          13,000
           Childers, Drawings ..............................................                    11,000
        (To close drawings accounts for 2010.)
        Revenues ...................................................................   90,000
           Expenses (adjusted by first entry) .....................                             59,000
           Income Summary ................................................                      31,000
        (To close revenue and expense accounts for 2010.)

        Income Summary ......................................................       31,000
            Page, Capital ........................................................              11,000
            Childers, Capital ..................................................                20,000
        (To close net income to partners' capital–see allocation plan shown below.)
        Allocation of Income                                            Page            Childers
        Interest (10% of beginning balance)                         $ 8,000               $ 3,000
        Salary allowances                                              5,000               20,000
        Remaining income (loss):
                $31,000
                 (11,000)
                 (25,000)
                $ (5,000)                                             (2,000) (40%)        (3,000) (60%)
                                                                   $11,000               $20,000


                                                        14-21
Chapter 14 - Partnerships: Formation and Operations


24. (continued)

    d. Total capital (original balances of $110,000 plus 2010
          net income less drawings) .................................                     $117,000
       Investment by Smith .................................................                 43,000
       Total capital after investment ..................................                  $160,000
       Ownership portion acquired by Smith ....................                                20%
       Smith, capital ............................................................         $ 32,000
       Amount paid ..............................................................            43,000
       Bonus paid by Smith—assigned to original partners                                   $ 11,000

        Bonus to Page (40%) ................................................                $4,400

        Bonus to Childers (60%) ..........................................                  $6,600

        Cash ..........................................................................     43,000
          Smith, Capital (20% of total capital) ..................                                    32,000
          Page, Capital ........................................................                       4,400
          Childers, Capital ..................................................                         6,600




                                                           14-22
Chapter 14 - Partnerships: Formation and Operations


25. (40 Minutes) (Reporting a change in the composition of a partnership)

    a. Exact amount of investment can only be computed algebraically:

         E Investment = 25% (Original Capital + E Investment)
                    El = .25 ($270,000 + El)
                    El = $67,500 + .25 El
                .75 El = $67,500
        E Investment = $90,000

    b. Implied value of partnership ($36,000 ÷ 10%) .........                                  $360,000
       Total capital after investment by E ($270,000 + $36,000)                                  306,000
       Goodwill ....................................................................            $ 54,000
       Allocation of Goodwill:
          A (30%) ...............................................................    $16,200
          B (10%) ...............................................................      5,400
          C (40%) ...............................................................     21,600
          D (20%) ...............................................................     10,800
              Total ................................................................ $54,000

    CAPITAL BALANCES
                                     A                B                C               D              E
    Original balances          $20,000          $40,000         $ 90,000        $120,000            $-0-
    Goodwill (above)            16,200            5,400           21,600          10,800             -0-
    Investment                      -0-              -0-              -0-             -0-        36,000
    Capital balances          $ 36,200          $45,400        $111,600         $130,800        $36,000

    c. Because E's investment of $42,000 is less than 20% of the resulting capital
       ($312,000). E is apparently bringing some other attribute to the partnership
       (goodwill) that must be computed:

             E Investment = 20% (Original Capital + E Investment)
        $42,000 + Goodwill = .20 ($270,000 + $42,000 + Goodwill)
        $42,000 + Goodwill = $62,400 + .20 Goodwill
              .80 Goodwill = $20,400
                  Goodwill = $25,500

    E's investment is, therefore, $42,000 in cash and $25,500 in goodwill for a total
    capital balance of $67,500; the other capital accounts remain unchanged. Note
    that E's capital of $67,500 is 20% of the new total capital $337,500 ($270,000 +
    $67,500).




                                                   14-23
Chapter 14 - Partnerships: Formation and Operations


25. (continued)

d.      Total capital after investment ($270,000 + $55,000)                                       $325,000
        Amount acquired by E ..............................................                            20%
        E's capital balance ...................................................                    $ 65,000
        E's payment ...............................................................                  55,000
        Bonus being given to E ............................................                        $ 10,000

        Bonus from:
          A (10%) ...............................................................       $1,000
          B (30%) ...............................................................        3,000
          C (20%) ...............................................................        2,000
          D (40%) ...............................................................        4,000     $10,000

                                        CAPITAL BALANCES
                                        A          B        C                                D           E
     Original balances            $20,000    $40,000  $90,000                         $120,000         $-0-
     Investment                        -0-        -0-      -0-                              -0-     55,000
     Bonus (above)                 (1,000)    (3,000)  (2,000)                          (4,000)     10,000
     Capital balances             $19,000    $37,000  $88,000                         $116,000     $65,000

e. C's capital balance                                                 $ 90,000
   C's collection (125%)                                                112,500
   Bonus being paid to C                                               $ 22,500

     Bonus from:
       A (1/3)                                         $7,500
       B (1/3)                                          7,500
       D (1/3)                                          7,500           $22,500

                                           CAPITAL BALANCES
                                                      A        B                             C         D
     Original balances .................        $20,000  $40,000                      $ 90,000 $120,000
     Bonus (above) ......................        (7,500)  (7,500)                       22,500    (7,500)
     Payment ................................        -0-      -0-                     (112,500)       -0-
     Capital balances ..................        $12,500  $32,500                       $    -0- $112,500




                                                        14-24
Chapter 14 - Partnerships: Formation and Operations


26. (55 Minutes) (Allocation of income to the partners and determination of capital
    balances)

                                 ALLOCATION OF INCOME—2009
                                                    Boswell    Johnson       Total
    Salary (8 months) .................              $8,000         $-0-     $ 8,000
    Remaining $3,000 ................                 1,200 (40%) 1,800 (60%) 3,000
       Totals ...............................        $9,200      $1,800     $11,000

           STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2009
                                             Boswell  Johnson     Total
    Beginning Balances ($114,000
       Invested capital split evenly—
       market value used for assets)         $57,000   $57,000 $114,000
    Income allocation (above) ...              9,200     1,800   11,000
    Drawings ...............................      -0-       -0-      -0-
       Ending balances .............         $66,200   $58,800 $125,000

                     WALPOLE INVESTMENT JANUARY 1, 2010
    Walpole's $54,000 investment increases total capital to $179,000. Walpole is
    credited with a 40% interest or $71,600. According to the problem, the excess
    $17,600 is a bonus from the original partners. Of this amount, $10,560 is
    allocated from Johnson (60%) and $7,040 from Boswell (40%).


                                  ALLOCATION OF INCOME—2010

                                                Boswell    Johnson      Walpole      Total
    Salary .................................... $12,000        $-0-     $24,000    $36,000
    Remaining $8,000 loss ($28,000 –
       $36,000) ...........................        (960)      (3,840)    (3,200)    (8,000)
          Totals .........................      $11,040      $(3,840)   $20,800    $28,000



               STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2010

                                               Boswell     Johnson      Walpole      Total
    Beginning balances .............           $66,200      $58,800         $ -0- $125,000
    Walpole's contribution ........             (7,040)      (10,560)     71,600    54,000
    Income allocation (above) ...               11,040        (3,840)     20,800    28,000
    Drawings ...............................    (5,000)       (5,000)    (10,000)  (20,000)
       Ending balances .............           $65,200      $39,400      $82,400 $187,000




                                                  14-25
Chapter 14 - Partnerships: Formation and Operations


26. (continued)
                     ADMISSION OF POPE—JANUARY 1, 2011
    Pope's payment was made directly to the partners. Therefore, neither goodwill
    nor a bonus need be recognized. Instead, 10% of each capital balance shown
    above will be reclassified to Pope. The journal entry would be as follows:

    Boswell, Capital .............................................................    6,520
    Johnson Capital .............................................................     3,940
    Walpole, Capital . ............................................................   8,240
       Pope, Capital .............................................................               18,700


                                   ALLOCATION OF INCOME—2011

                                        Boswell        Johnson             Walpole      Pope         Total
    Salary                             $12,000               $-0-         $24,000      $9,600     $45,600
    Remaining $400 income                   54               162              144          40         400
    Totals                             $12,054              $162          $24,144      $9,640     $46,000



            STATEMENT OF PARTNERSHIP CAPITAL—DECEMBER 31, 2011

                                       Boswell Johnson                    Walpole       Pope        Total
    Beginning balances                 $65,200  $39,400                   $82,400         $-0-   $187,000
    Admission of Pope                   (6,520)  (3,940)                   (8,240)     18,700          -0-
    Allocation of income
       (above)                          12,054             162             24,144       9,640   46,000
    Drawings                            (5,000)         (5,000)           (10,000)     (4,000) (24,000)
       Ending balances                 $65,734         $30,622            $88,304     $24,340 $209,000




                                                         14-26
Chapter 14 - Partnerships: Formation and Operations


27. (60 Minutes) (Allocate income and prepare a statement of partners' capital)

a. Income Allocation—2009
                                                      Gray      Stone    Lawson       Totals
    Salary allowance ($8 per billable
       hour)                          $13,680                 $11,520    $10,400     $35,600
    Interest (see Note A)              25,928                  21,600     10,800      58,328
    Bonus (not applicable because
       salary and interest would
       necessitate a negative bonus)       -0-                     -0-        -0-        -0-
    Remaining loss (split evenly):
         $ 65,000
          (35,600)
          (58,328)
         $(28,928)                     (9,643)                 (9,643)    (9,642)    (28,928)
        Profit allocation                      $29,965        $23,477    $11,558     $65,000

    Note A: Interest for Stone and Lawson is calculated at 12% of their beginning
    capital balances ($180,000 and $90,000, respectively) while for Gray the
    computation is based on a $210,000 balance for 4/12 of the year and $219,100
    for the remaining 8/12.

    Capital Account Balances—1/1/09 – 12/31/09

                                                Gray          Stone      Lawson       Totals
    Beginning contributions                   $210,000       $180,000    $90,000    $480,000
    Added Investment                             9,100             -0-        -0-      9,100
    Profit allocation (from above)              29,965         23,477     11,558      65,000
    Drawing (10% of beginning
       balances)                               (21,000)       (18,000)    (9,000)    (48,000)
    Ending balances                           $228,065       $185,477    $92,558    $506,100

    Prior to developing the information for 2010, a computation of Monet's
    investment must be made:

    Monet's Investment = 25% ($506,100 + Monet's Investment)
                     Ml = $126,525 + .25 Ml
                 .75 Ml = $126,525
                     Ml = $168,700




                                                  14-27
Chapter 14 - Partnerships: Formation and Operations


27. a. (continued)
   Income Allocation—2010
                              Gray               Stone     Lawson        Monet        Totals
   Salary allowance ($8
        per billable hour) $14,400            $ 12,000     $ 11,040     $ 9,520     $ 46,960
   Interest (12% of begin-
        ning capital balances
        for the year)        27,368              22,257     11,107       20,244       80,976
   Bonus (not applicable) -0-                        -0-        -0-          -0-          -0-
   Remaining loss (split
            evenly):
              $ (20,400)
                (46,960)
                (80,976)
             $(148,336)    (37,084)             (37,084)    (37,084)     (37,084)   (148,336)
   Loss allocation          $ 4,684             $(2,827)   $(14,937)    $ (7,320)   $(20,400)

    Capital Account Balances 1/1/10 – 12/31/10
                           Gray        Stone               Lawson        Monet        Totals
    Beginning balances $228,065    $185,477                $92,558     $168,700     $674,800
    Loss allocation (from
       above)              4,684      (2,827)               (14,937)     (7,320)     (20,400)
    Drawings (10% of
       beginning
       balances)         (22,806)    (18,548)               (9,256)     (16,870)     (67,480)
    Ending balances $209,943       $164,102                $68,365     $144,510     $586,920

    Income Allocation—2011
                            Gray                 Stone     Lawson        Monet        Totals
    Salary allowance ($8
       per billable hour) $15,040              $12,960     $10,480      $12,640     $ 51,120
    Interest (12% of
       beginning capital
       balances for the
       year)               25,193                19,692       8,204      17,341       70,430
    Bonus (see Note B)      2,604                 2,604          -0-         -0-       5,208
       Remaining profit split
       evenly:
            $152,800
              (51,120)
              (70,430)
               (5,208)
            $ 26,042        6,510                6,510       6,511        6,511       26,042
    Profit allocation     $49,347              $41,766     $25,195      $36,492     $152,800



                                                  14-28
Chapter 14 - Partnerships: Formation and Operations




27. a. (continued)

    Note B: The bonus to Gray and Stone can only be derived algebraically.
    Because each of the two partners is entitled to 10% of net income as defined,
    the total bonus is 20% and can be computed as follows:
         Bonus = 20% (Net income – Salary – Interest – Bonus)
               B = .2 ($152,800 – $51,120 – $70,430 – B)
               B = .2 ($31,250 – B)
               B = $6,250 – .2B
          1.2 B = $6,250
               B = $5,208 (or $2,604 per person)


    Capital Account Balances 1/1/11 – 12/31/11

                             Gray     Stone               Lawson        Monet      Totals
    Beginning balances $209,943 $164,102                  $68,365     $144,510    $586,920
    Profit allocation (from
       above)                 49,347   41,766               25,195      36,492     152,800
    Drawings (10% of
       beginning
       balances)             (20,994) (16,410)              (6,837)    (14,451)    (58,692)
    Ending balances         $238,296 $189,458              $86,723    $166,551    $681,028


    b.
                                GRAY, STONE, AND LAWSON
                                Statement of Partners' Capital
                              For Year Ending December 31, 2009

                                                 Gray        Stone    Lawson        Totals
    Beginning balances                        $210,000    $180,000    $90,000     $480,000
    Added Investment                             9,100          -0-        -0-       9,100
    Profit allocation                           29,965      23,477     11,558       65,000
    Drawings                                   (21,000)    (18,000)    (9,000)     (48,000)
    Ending balances                           $228,065    $185,477    $92,558     $506,100




                                                  14-29
Chapter 14 - Partnerships: Formation and Operations


28. (40 Minutes) (Recording admission and retirement of partners using both the
    bonus and goodwill methods)

    a. Porthos, Capital ........................................................ 35,000
          D'Artagnan, Capital .............................................             35,000
       (To reclassify half of Porthos's capital balance to reflect transfer of interest
       to D'Artagnan.)

    b. Goodwill     ............................................................... 50,000
          Athos, Capital (50%) ...........................................                 25,000
          Porthos, Capital (30%) .......................................                   15,000
          Aramis, Capital (20%) .........................................                  10,000
      (To record goodwill based on $250,000 implied value of partnership [$25,000
      ÷ 10%]. Because current capital is only $200,000 [the $25,000 goes directly
      to the partners], goodwill of $50,000 has to be recorded and allocated using
      profit and loss ratio.)

        Athos, Capital (10% of balance) ..............................        10,500
        Porthos, Capital (10% of balance) ...........................          8,500
        Aramis, Capital (10% of balance) ............................          6,000
           D'Artagnan, Capital ..............................................        25,000
      (To reclassify 10% of each partner's capital to reflect transfer of interest to
      D'Artagnan.)

    c. Cash .......................................................................... 30,000
          D'Artagnan, Capital (10% of total capital) ..........                               23,000
          Athos, Capital (50% of excess payment) ...........                                   3,500
          Porthos, Capital (30% of excess payment) .......                                     2,100
          Aramis, Capital (20% of excess payment) .........                                    1,400
       (To record $30,000 payment by D'Artagnan which increases total capital to
       $230,000. D'Artagnan is credited for only 10% of that balance with the extra
       $7,000 payment being recorded as a bonus to the original partners.)

    d. Cash .......................................................................... 30,000
       Goodwill ....................................................................   70,000
           D'Artagnan, Capital .............................................                  30,000
           Athos, Capital (50% of goodwill) .......................                           35,000
           Porthos, Capital (30% of goodwill) ...................                             21,000
           Aramis, Capital (20% of goodwill) ......................                           14,000
       (To record D'Artagnan's contribution to the partnership. The $30,000
       payment for 10% interest indicates a $300,000 value for the business
       although the capital balances would only increase to $230,000. The $70,000
       difference is recorded as goodwill, an amount assigned to the original
       partners.)



                                                  14-30
Chapter 14 - Partnerships: Formation and Operations


28. (continued)

    e. Cash ........................................................................... 12,222
       Goodwill . ..................................................................    10,000
          D'Artagnan, Capital .............................................                    22,222
      To record investment by D'Artagnan. The implied value of the investment as
      a whole would be only $122,220 ($12,222 ÷ 10%). Because the capital
      balances are well in excess of this figure, D'Artagnan is apparently bringing
      some other factor (goodwill) into the partnership. This goodwill can be
      computed as follows:
                  $12,222 + Goodwill = 10% (Original Capital + $12,222 + Goodwill)
                  $12,222 + Goodwill = 10% ($200,000 + $12,222 + Goodwill)
                  $12,222 + Goodwill = $21,222 + .10 Goodwill
                             .90 Goodwill = $9,000
                                    Goodwill = $10,000

    f. Goodwill .................................................................... 80,000
          Athos, Capital (50%) ............................................                 40,000
          Porthos, Capital (30%) ........................................                   24,000
          Aramis, Capital (20%) ..........................................                  16,000
       (To record goodwill of $80,000 based on $280,000 appraisal of business.)

        Aramis, Capital .........................................................    66,000
           Cash ....................................................................        66,000
        (To distribute cash to retiring partner based on final capital balance.)




                                                  14-31
Chapter 14 - Partnerships: Formation and Operations


29. (75 Minutes) (Recording of changes in the composition of a partnership
     including allocation of income)

    a. 1/1/09       Building .....................................................   52,000
                    Equipment ..................................................     16,000
                    Cash ........................................................... 12,000
                       O'Donnell, Capital ...............................                   40,000
                       Reese, Capital .....................................                 40,000
                    (To record initial investment. Assets recorded at fair value with
                    two equal capital balances.)

        12/31/09 Reese, Capital ........................................... 22,000
                    O'Donnell, Capital ...............................             12,000
                    Income Summary ................................                10,000
                 (The allocation plan specifies that O'Donnell receives 20% in
                 interest [or $8,000 based on $40,000 capital balance] plus $4,000
                 more [Because that amount exceeds 15% of the profits from the
                 period]. The remaining $22,000 loss is assigned to Reese.)

        1/1/10      Cash ........................................................... 15,000
                    O'Donnell, Capital (15%) ..........................                 300
                    Reese, Capital (85%) ................................             1,700
                       Dunn, Capital .......................................                17,000
                    (New investment by Dunn brings total capital to $85,000 after
                    2009 loss [$80,000 – $10,000 + $15,000]. Dunn's 20% interest is
                    $17,000 [$85,000 × 20%] with the extra $2,000 coming from the
                    two original partners [allocated between them according to their
                    profit and loss ratio].)

        12/31/10 O'Donnell, Capital .....................................   10,340
                 Reese, Capital ...........................................  5,000
                 Dunn, Capital ............................................  5,000
                     O'Donnell, Drawings ............................              10,340
                     Reese, Drawings .................................              5,000
                     Dunn, Drawings ...................................             5,000
                 (To close out drawings accounts for the year based on
                 distributing 20% of each partner's beginning capital balances
                 [after adjustment for Dunn's investment] or $5,000 whichever is
                 greater. O'Donnell's capital is $51,700 [$40,000 + $12,000 – $300])

        12/31/10 Income Summary ......................................    44,000
                    O'Donnell, Capital ...............................           16,940
                    Reese, Capital .....................................         16,236
                    Dunn, Capital .......................................        10,824
                 (To allocate $44,000 income figure for 2010 as determined below.)

                                                  14-32
Chapter 14 - Partnerships: Formation and Operations


    29. a. (continued)
                                                                     O'Donnell       Reese       Dunn
    Interest (20% of $51,700
       beginning capital balance) .......                              $10,340
    15% of $44,000 income ..................                             6,600
    60:40 spilt of remaining $27,060
       income .......................................                               $16,236    $10,824
    Total ................................................             $16,940      $16,236    $10,824

    Capital Balances as of December 31, 2010:
                                                                     O'Donnell       Reese       Dunn
    Initial 2009 investment ...................                        $40,000      $40,000
    2009 profit allocation .....................                        12,000      (22,000)
    Dunn's investment .........................                           (300)      (1,700)   $17,000
    2010 drawings ................................                     (10,340)      (5,000)    (5,000)
    2010 profit allocation .....................                        16,940       16,236     10,824
    12/31/10 balances ..........................                       $58,300      $27,536    $22,824

        1/1/11         Dunn, Capital ............................................    22,824
                          Postner, Capital ...................................                  22,824
                       (To reclassify balance to reflect
                       acquisition of Dunn's interest.)

        12/31/11 O'Donnell, Capital .....................................            11,660
                 Reese, Capital ...........................................           5,507
                 Postner, Capital ........................................            5,000
                    O'Donnell, Drawings ...........................                             11,660
                    Reese, Drawings .................................                            5,507
                    Postner, Drawings ..............................                             5,000
                 (To close out drawings accounts for the
                 year based on 20% of beginning capital
                 balances [above] or $5,000 [whichever is
                 greater].)

        12/31/11 Income Summary.......................................   61,000
                    O'Donnell, Capital ...............................                          20,810
                    Reese, Capital .....................................                        24,114
                    Postner, Capital ...................................                        16,076
                 (To allocate profit for 2011 determined as follows)

                                                                     O'Donnell       Reese     Postner
        Interest (20% of $58,300 beg. capital)                         $11,660
        15% of $61,000 income ............                               9,150
        60:40 split of remaining $40,190                                ______      $24,114    $16,076
              Totals ...............................                   $20,810      $24,114    $16,076

                                                             14-33
Chapter 14 - Partnerships: Formation and Operations


29. a. (continued)
       1/1/12   Postner, Capital ........................................               33,900
                O'Donnell, Capital (15%) ..........................                        509
                Reese, Capital (85%) ................................                    2,881
                   Cash .....................................................                    37,290
                (Postner's capital is $33,900 [$22,824 –
                $5,000 + $16,076]. Extra 10% payment is
                deducted from the two remaining
                partners' capital accounts.)

    b. 1/1/09        Building ......................................................    52,000
                     Equipment .................................................        16,000
                     Cash ...........................................................   12,000
                     Goodwill ....................................................      80,000
                        O'Donnell, Capital ...............................                       80,000
                        Reese, Capital .....................................                     80,000
                     (To record initial capital investments.
                     Reese is credited with goodwill of
                     $80,000         to          match              O'Donnell's
                     investment.)

        12/31/09 Reese, Capital ...........................................             30,000
                     O'Donnell, Capital ...............................                          20,000
                     Income Summary ................................                             10,000
                 (Interest of $16,000 is credited to
                 O'Donnell [$80,000 × 20%] along with a
                 base of $4,000. The remaining amount is
                 now a $30,000 loss that is attributed
                 entirely to Reese.)

        1/1/10       Cash ...........................................................   15,000
                     Goodwill ....................................................      22,500
                        Dunn, Capital .......................................                    37,500
                     (Cash and goodwill being contributed by
                     Dunn are recorded. Goodwill must be
                     calculated algebraically.)


        $15,000 + Goodwill = 20% (Current Capital + $15,000 + Goodwill)
        $15,000 + Goodwill = 20% ($150,000 + $15,000 + Goodwill)
        $15,000 + Goodwill = $33,000 + .2 Goodwill
               .8 Goodwill = $18,000
                  Goodwill = $22,500




                                                        14-34
Chapter 14 - Partnerships: Formation and Operations


29. b. (continued)
       12/31/10 O'Donnell, Capital .....................................   20,000
                Reese, Capital ........................................... 10,000
                Dunn, Capital ............................................  7,500
                   O'Donnell, Drawings ............................                    20,000
                   Reese, Drawings .................................                   10,000
                   Dunn, Drawings ...................................                   7,500
                (To close out drawings accounts for the
                year based on 20 % of beginning capital
                balances: O'Donnell—$100,000, Reese—
                $50,000, and Dunn—$37,500.)
       12/31/10 Income Summary ......................................      44,000
                   O'Donnell, Capital ...............................                  26,600
                   Reese, Capital .....................................                10,440
                   Dunn, Capital .......................................                6,960
                (To allocate $44,000 income figure as follows)

                                                          O'Donnell       Reese         Dunn
                 Interest (20% of $100,000
                    beginning capital balance)             $20,000
                 15% of $44,000 income                       6,600
                 60:40 split of remaining $17,400                        $10,440       $6,960
                    Totals                                 $26,600       $10,440       $6,960

                 Capital balances as of December 31, 2010:
                                                 O'Donnell                Reese         Dunn
                 Initial 2009 investment ..         $ 80,000             $80,000
                 2009 profit allocation .....         20,000             (30,000)
                 Additional investment ...                                            $37,500
                 2010 drawings ................      (20,000)            (10,000)      (7,500)
                 2010 profit allocation .....         26,600              10,440        6,960
                 12/31/10 balances ..........      $106,600              $50,440      $36,960
        1/1/11      Goodwill .................................................... 26,588
                       O'Donnell, Capital (15%) .....................                     3,988
                       Reese, Capital (51%) ...........................                  13,560
                       Dunn, Capital (34%) ............................                   9,040
                    (To record goodwill indicated by purchase of Dunn's interest.)
    In effect, profits are shared 15% to O'Donnell, 51% to Reese – (60% of the 85%
    remaining after O'Donnell's income), and 34% to Dunn (40% of the 85%
    remaining after O'Donnell's income). Postner is paying $46,000, an amount
    $9,040 in excess of Dunn's capital ($36,960). The additional payment for this
    34% income interest indicates total goodwill of $26,588 ($9,040 ÷ 34%).
    Because Dunn is entitled to 34% of the profits but only holds 19% of the total
    capital, an


                                                  14-35
Chapter 14 - Partnerships: Formation and Operations




    29.      b. (continued)

    implied value for the company as a whole cannot be determined directly from
    the payment of $46,000. Thus, goodwill can only be computed based on the
    excess payment.

    1/1/11      Dunn, Capital ..................................................    46,000
                   Postner, Capital ........................................                   46,000
             (To reclassify capital balance to new partner.)
    12/31/11 O'Donnell, Capital ..........................................   22,118
             Reese, Capital ................................................ 12,800
             Postner, Capital .............................................   9,200
                O'Donnell, Drawings ................................                22,118
                Reese, Drawings .......................................             12,800
                Postner, Drawings ....................................               9,200
          (To close out drawings accounts for the year based on 20% of
          beginning capital balances [after adjustment for goodwill].)
    12/31/11 Income Summary ...........................................             61,000
                 O'Donnell, Capital .....................................                      31,268
                 Reese, Capital ...........................................                    17,839
                 Postner, Capital ........................................                     11,893
          To allocate profit for 2011 as follows:
                                                                  O'Donnell         Reese     Postner
             Interest (20% of $110,588
                 beginning capital balance)                          $22,118
             15% of $61,000 income .......                             9,150
             60:40 spilt of remaining
                 $29,732 ............................                              $17,839    $11,893
                 Totals ...............................              $31,268       $17,839    $11,893
    Capital Balances as of December 31, 2011:
                                                                  O'Donnell         Reese     Postner
             12/31/10 balances ................                    $106,600        $50,440    $36,960
             Adjustment for goodwill .....                            3,988         13,560      9,040
             Drawings ...............................               (22,118)       (12,800)    (9,200)
             Profit allocation ....................                  31,268         17,839     11,893
             12/31/11 balances .................                   $119,738        $69,039    $48,693
    Postner will be paid $53,562 (110% of the capital balance) for her interest. This
    amount is $4,869 in excess of the capital account. Because Postner is only
    entitled to a 34% share of profits and losses, the additional $4,869 must
    indicate that the partnership as a whole is undervalued by $14,321 (4,869 ÷
    34%). Only in that circumstance would the extra payment to Postner be
    justified:

                                                        14-36
Chapter 14 - Partnerships: Formation and Operations




    29. b. (continued)


    1/1/12 Goodwill ...............................................................   14,321
              O'Donnell, Capital (15%) ...............................                          2,148
              Reese, Capital (51%) ......................................                       7,304
              Postner, Capital (34%) ...................................                        4,869
           (To recognize implied goodwill.)
    1/1/12 Postner, Capital ...................................................       53,562
              Cash ...............................................................             53,562
           (To record final distribution to Postner.)




                                                         14-37
Chapter 14 - Partnerships: Formation and Operations


Develop Your Skills

Research Case

This assignment allows the student to make use of the SEC website and, then,
the EDGAR system. It also provides a chance to use actual statements created
for a partnership rather than those typically produced for a corporation.

Probably the most noticeable characteristic of the statements for Buckeye
Partners is that they resemble corporate financial statements in most ways. A
casual overview might not bring any differences to mind. However, a close
reading will show several differences including the following:

       On the income statement, net income is allocated between the general
        partner and limited partners.
       Also, on the income statement earnings per share is replaced with a figure
        labeled as “earnings per partnership unit.”
       The balance sheet does not present a stockholders’ equity section but
        rather partnership capital. That section is comprised of just two figures:
        one for the general partner and the other for the limited partners.
       The first two paragraphs of Note One to the financial statements describe
        the partnership organization.
       A later paragraph presents a schedule reflecting the changes in
        partnership capital for both the general partner and the limited partners.

Analysis Case

An unlimited number of allocation plans can be developed for any partnership.
Here, Wilson will be interested in some reward for investing the capital used to
create the business. Higgins will expect to be recognized for the work put into
the operation. Poncelet should seek some reward for any new clients that she is
able to bring to the business.

One possibility would be to accrue interest to Wilson on her capital balance for
the year based, perhaps, on the prime rate. Poncelet could be assigned a
particularly high share of any revenues generated from new clients. The amount
of income left would result from Higgins’s work in the day-to-day operations of
the business so a large part of that remainder could be assigned to her.




                                                  14-38
Chapter 14 - Partnerships: Formation and Operations


As an alternative, Wilson could be allocated an interest factor but only based on
the initial amount invested in the business rather than the capital balance as a
whole. Higgins could be assigned some type of allowance for the number of
hours of work put in each period. Any remaining income could be divided evenly
among the three partners but only up to a certain level. Beyond that, perhaps
only Poncelet and Higgins would share in the income Because they are doing the
work, one in gaining new clients and the other in the day-to-day operations of the
business.

Communication Cases 1 and 2

These two cases ask the student to identify the types of factors that will lend
themselves toward the organization becoming a corporation (in Case 1) or a
partnership (in Case 2). Several issues should be considered when looking into a
legal format for a business enterprise:

       Do state laws play any role in the decision? In some states, particular
        types of organizations are prohibited from operating as a corporation. Will
        state law come into play in making this decision? If so, the partnership
        form of organization will be required.
       How big do the owners expect the company to become? If the business
        will remain small, there may be no need to raise additional capital so that
        the ability to sell ownership may not be an issue. This favors creation of a
        partnership. However, if Birmingham and Roberts expect the business to
        prosper and grow, they should consider which type of business will enable
        them to attract other capital or debt investments. Usually, it is a
        corporation that is best set up to enable growth through the issuance of
        securities.
       How risky is the business operation? If the company is operating in a
        business where liability is not a significant problem, the limited liability of a
        corporation might not be of much interest. However, if there is some risk
        involved, the two owners may need the corporate type of organization just
        for their own financial security.
       How well do the owners know and trust each other? As with the previous
        comment, potential liability can be greatly enhanced if the owners do not
        know each other well or if additional owners are expected to join at a later
        point in time. Under that circumstance, everyone may feel more
        comfortable if the business is created as a corporation or as one of the
        limited liability organizations. If the owners, though, are comfortable with
        each other, they may not feel the necessity of creating a formalized
        corporation.




                                                  14-39
Chapter 14 - Partnerships: Formation and Operations


       What changes will occur in the tax laws? At this writing, dividends paid by
        a corporation to its owners are taxable at 15%. However, President George
        W. Bush has proposed the elimination of part or all of that tax.
        Corporations become much more appealing if dividend income is not
        taxed.
       How much money do they have available to create a legal organization? In
        most states, creation of a partnership can be virtually free whereas the
        legal formality of a corporation can cost money. If finances are tight, the
        business could begin as a partnership and then convert to a corporation at
        a later date as monetary restrictions ease.

Excel Case

There are a number of different ways that a spreadsheet could be created to solve
this particular problem. Here is one possible approach:

In Cell A1, enter label text “Net Income” and in Cell B1 enter $200,000.
In Cell A2, enter label text “Billable Hours – Red” and in Cell B2 enter 2,000. In
Cell C2, enter the hourly rate of $20.
In Cell A3, enter label text “Billable Hours – Blue” and in Cell B3 enter 1,500. In
Cell C3, enter the hourly rate of $30.
In Cell A4, enter label text “Investment – Red” and in Cell B4 enter $80,000. In Cell
C4, enter the rate of return of 10%.
In Cell A5, enter label text “Investment – Blue” and in Cell B5 enter $50,000. In
Cell C5, enter the rate of return of 10%.

Perform calculations:
In Cell D2, enter formula to multiply number of hours by hourly rate. Formula:
=+B2*C2

The formula for the next three line items is identical to this first formula; copy the
formula to Cells D3, D4, and D5. (To copy a formula across a range of cells,
select the cell containing formula, then drag the fill handle, which is the small
square in the lower right corner of this box, over the adjacent cells. Note that the
formula will adjust automatically for the different lines.)

In Cell A6, enter label text “Subtotal” and SUM the amounts in Cells D2 through
D5. Click in Cell D6, press the  symbol on the standard toolbar. Click and drag
across the range of cells to be summed (D2 through D5) and press enter.

Subtract the subtotal of the partner’s initial allocations (Cell D6) from the Net
Income (Cell B1) with the following formula: In Cell A8, enter the label text “Profit
to be Split” and in Cell D8, enter the following formula: =+B1-D6.




                                                  14-40
Chapter 14 - Partnerships: Formation and Operations


Determine the distribution of Profit between partners:

In Cell A10, enter label text “Profit – Red” and in Cell C10 enter “50%”.
In Cell A11, enter label text “Profit – Blue” and in Cell C11 enter “50%”.

Perform calculations:
In Cell D10, enter formula to multiply Profit to be Split (Cell D8) by distribution
percentage (Cell C10). Formula: =+D8*C10

Repeat this calculation for the other partner. In Cell D11, enter the formula:
=+D8*C11

Once this spreadsheet has been created, any of the variables may be changed
and the results will adjust automatically. There are eleven variables that can be
changed: B1, B2, B3, B4, B5, C2, C3, C4, and C5, as well as C10 and C11 (which
must add up to 100%).




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