PARTNERSHIP FORMATION

QUIZ ASSIGNMENT
FILENAME: QA3_FIRSTNAME_PARTNERSHIPOPERATIONS;
EXAMPLE: QA3_ALRAJIV_PARTNERSHIPOPERATIONS

SHOW YOUR SOLUTIONS: IF POSSIBLE, USING THE TECHNIQUES

TAUGHT IN VIDEO DISCUSSION, IF NOT, THEN IT IS PURELY
OKAY.

1. Partnership income allocation—Bonus (3pts)

Arnold, Beverly, and Carolyn are partners who share profits and losses 40:40:20, respectively,
after Beverly, who manages the partnership, receives a bonus of 10 percent of income, net of the
bonus. Partnership income for the year is $198,000.

REQUIRED: Prepare a schedule to allocate partnership income to Arnold, Beverly, and Carolyn.

2. Partnership income allocation—Salary allowance (5pts)

Mel and Dav created a partnership to own and operate a health-food store. The partnership
agreement provided that Mel receive a salary of $10,000 and Dav a salary of $5,000 to recognize
their relative time spent in operating the store.

Remaining profits and losses were divided 60:40 to Mel and Dav, respectively. Income of
$13,000 for 2011, the first year of operations, was allocated $8,800 to Mel and $4,200 to Dav.

On January 1, 2012, the partnership agreement was changed to reflect the fact that Dav could no
longer devote any time to the store’s operations. The new agreement allows Mel a salary of
$18,000, and the remaining profits and losses are divided equally. In 2012 an error was
discovered such that the 2011 reported income was understated by $4,000. The partnership
income of $25,000 for 2012 included this $4,000 related to 2011.

REQUIRED: Prepare a schedule to allocate the $25,000 reported 2012 partnership income to
Mel and Dav.
3. Partnership income allocation—Salary allowance and interest (5pts)

The partnership agreement of Dan, Hen, and Bai provides that profits are to be divided as
follows:
■ Bai receives a salary of $24,000, and Hen receives a salary of $18,000 for time spent in the
business.
■ All partners receive 10 percent interest on average capital balances.
■ Remaining profits and losses are divided equally among the three partners.
On January 1, 2011, the capital balances were Dan, $200,000; Hen, $160,000; and Bai,
$150,000. Dan invested an additional $40,000 on July 1 and withdrew $40,000 on October 1.
Hen and Bai had drawings of $18,000 each during the year.

REQUIRED: Prepare a schedule to allocate partnership net income of $28,000 for 2011.

4. Arthur Plack, a partner in the Brite Partnership, has a 30% participation in partnership profits
and losses. Plack’s capital account had a net decrease of $60,000 during the calendar year 2011.
During 2011, Plack withdrew $130,000 (charged against his capital account) and contributed
property valued at $25,000 to the partnership. What was the net income of the Brite Partnership
for 2011? (2pts)

5. Fox, Greg, and Howe are partners with average capital balances during 2011 of $120,000,
$60,000, and $40,000, respectively. Partners receive 10% interest on their average capital
balances. After deducting salaries of $30,000 to Fox and $20,000 to Howe, the residual profit or
loss is divided equally. In 2011 the partnership sustained a $33,000 loss before interest and
salaries to partners. By what amount should Fox’s capital account change? (2pts)

6. Beck, an active partner in the Beck and Cris partnership, receives an annual bonus of 25% of
partnership net income after deducting the bonus. For the year ended December 31, 2011,
partnership net income before the bonus amounted to $300,000. Beck’s 2011 bonus should be:
(2pts)
7. Partnership income allocation—Complex, net loss (6pts)
The partnership agreement of Alex, Carl, and Erika provides that profits are to be divided as
follows:
1. Alex is to receive a salary allowance of $10,000 for managing the partnership business.
2. Partners are to receive 10% interest on average capital balances. Drawings are excluded from
computing these averages.
3. Remaining profits are to be divided 30%, 30%, and 40% to Alex, Carl, and Erika,
respectively.
Alex had a capital balance of $60,000 at January 1, 2011, and had drawings of $8,000 on July 1,
2011. Carl’s capital balance on January 1, 2011, was $90,000, and he invested an additional
$30,000 on September 1, 2011. Erika’s beginning capital balance was $110,000, and she
withdrew $10,000 on July 1 but invested an additional $20,000 on October 1, 2011.
The partnership has a net loss of $12,000 during 2011, and the accountant in charge allocated the
net loss as follows: $200 profit to Alex, $4,800 loss to Carl, and $7,400 loss to Erika.
REQUIRED:
A. schedule to show the correct allocation of the partnership net loss for 2011