Sandburg and Williams are the ownders of a partnership that manufactures commercial lighting fixtures. Profits are allocated among the partners as follows:
Sandburg Williams
Salaries $100,000 $125,000
Bonus as a percentage of net income after the bonus 10% 0%
Interest on weighted-average capital including withdrawals and
excluding current-year profits 5% 5%
Sandburg was divorced as of the beginning of 20X5 and as part of the divorce stipulation agreed to the following:
1. The spouse is to receive annual distributions traceable to years 20X5 and 20X6. The annual distribution is to be the greater of $100,000 or 25% of base earnings.
2. Base earnings are defined as net income of the partnership less: (1) salaries traceable to Sandburg and Williams of $75,000 and $125,000, respectively, and (b) bonus to Sandburg as stated subject to the limitation that it not exceed $50,000.
3. Sandburg's spouse would receive a distribution from the partnership on August 31 of each current year and on February 28 of each subsequent year. The August 31 target distribution is $50,000. If the August distribution is less than $50,000, Sandburg's spouse will receive one-half year's interest on the deficiency at the rate of 10% per year. The following distribution on February 28 must be of an amount such that the two distributions equal the required distribution traceable to the calendar year just ended plus any interest associated with the August distribution.
4. All distributions to Sandburg's spouse are to be considered as a withdrawal of capital by Sandburg.
5. Aside from distributions to Sandburg's spouse, Sandburg's annual withdrawaals cannot exceed $125,000.
6. Upon sale or dissolution of the partnership prior on February 28, 20X6, Sandburg's spouse would receive 50% of the net realizable value of Sandburg's partnership capital.
7. On February 28,20x7, Sandburg's spouse will receive an additional final distribution equal to 50% of the sum of Sandburg's capital balance as of December 31, 20X6, less the amount of the February 20X7 distribution as called for by item (3) above.
Capital balances at the beginning of 20X5 were $180,000 and $125,000, respectively, for Sandburg and Williams. Activity related to the partnership during 20X5 and 20X6 is as follows:
20X5 20X6
Partnership net income $750,000 $700,000
Distribution to Sandburg's spouse
February 28 0 to be determined
August 31 40,000 50,000
Distribution to Sandburg:
June 30 60,000 125,000
September 30 65,000 0
Distribution to Williams
June 30 30,000 300,000
September 30 90,000 20,000
Prepare a schedule to determine the total amount of the distribution due Sandburg's spouse as of February 28, 20X7. Note that the solution requires one to determine the amount of the February 20X6 distribution to Sandburg's wife.