Question - Gray, Stone, and Lawson open an accounting practice on January 1, 2013, in San Diego, California, to be operated as a partnership. Gray and Stone will serve as the senior partners because of their years of experience. To establish the business, Gray, Stone, and Lawson contribute cash and other properties valued at $210,000, $180,000, and $90,000, respectively. An articles of partnership agreement is drawn up. It has the following stipulations:
- Personal drawings are allowed annually up to an amount equal to 10 percent of the beginning capital balance for the year.
- Profits and losses are allocated according to the following plan:
(1) A salary allowance is credited to each partner in an amount equal to $8 per billable hour worked by that individual during the year.
(2) Interest is credited to the partners' capital accounts at the rate of 12 percent of the average monthly balance for the year (computed without regard for current income or drawings).
(3) An annual bonus is to be credited to Gray and Stone. Each bonus is to be 10 percent of net income after subtracting the bonus, the salary allowance, and the interest. Also included in the agreement is the provision that the bonus cannot be a negative amount.
(4) Any remaining partnership profit or loss is to be divided evenly among all partners.
Because of monetary problems encountered in getting the business started, Gray invests an additional $9,100 on May 1, 2013. On January 1, 2014, the partners allow Monet to buy into the partnership. Monet contributes cash directly to the business in an amount equal to a 25 percent interest in the book value of the partnership property subsequent to this contribution. The partnership agreement as to splitting profits and losses is not altered upon Monet's entrance into the firm; the general provisions continue to be applicable.
The billable hours for the partners during the first three years of operation follow:
The partnership reports net income for 2013 through 2015 as follows:
Each partner withdraws the maximum allowable amount each year.
a. Determine the allocation of income for each of these three years (to the nearest dollar).
b. Prepare in appropriate form a statement of partners' capital for the year ending December 31, 2015.