Question

2015:

Matthew and Michael Goode (cousins) decide to form a partnership (M&M) on April 1, 2015. Each contributed personally-owned assets to start the new company. Matthew Goode contributed $100,250 in cash and property with book value of $57,750 and appraised value of $78,750. Michael Goode contributed cash of $99,750; computer equipment with book value of $52,500 and appraised value of $21,000; a software library with book value of $63,000 and appraised value of $23,500; and office equipment with book value of $57,750 and appraised value of $26,250. M&M operates on a calendar year.

The Articles of Partnership stipulate that no goodwill is to be recognized and that the two will start with capital balances equal to their contributions. Monthly cash draws of $1,350 each are allowed, beginning June 1, 2015. Net income is to be allocated as follows:

(a)Matthew is to receive a compensation allowance of $2,625 per month for managing the day-to-day operations of the partnership.

(b)Interest of 12.25% to be paid on ending balances of capital accounts, PLUS 15% interest on ending capital balances in excess of $262,500 (all interest to be calculated without current income allocation).

(c)Each partner is to receive a bonus equal to 15% of net income, after the compensation allowance, interest, and bonuses. Negative bonuses are not allowed.

(d)Remainder of profit to be allocated in a 55:45 ratio, Matthew:Michael.

(e)Remainder of loss to be allocated in a 50:50 ratio.

Net partnership income for 2015 was $210,000.

2016:

June 1, 2016, Maxwell Goode (Matthew’s twin brother) joins the partnership (ThreeM). He purchases 1/3 of Matthew’s ownership interest for cash of $78,750 and 1/4 of Michael’s ownership interest for cash of $63,000, paid directly to the partners.

The Articles of Partnership are amended as follows for allocation of net income:

(a)In addition to Matthew’s compensation allowance, Michael will receive a compensation allowance of $1,575 per month, and Maxwell $1,260 per month.

(b)Unchanged.

(c)Matthew, Michael, and Maxwell are to receive bonuses of 12.5%, 12.5% and 10%, respectively, of net income after the compensation allowances, interest, and bonuses. Negative bonuses are not allowed.

(d)Remainder of profit to be allocated in a 40:35:25 ratio, Matthew:Michael:Maxwell.

(e)Remainder of loss to be allocated equally among the three partners.

Net partnership income for 2016 was $262,500.

2017:

Morgan (Michael’s younger brother) is admitted to the partnership (MM MM Goode) on January 2, 2017. He purchases a 32% interest for a cash payment of $260,000, paid directly to the partnership.

The Articles of Partnership are amended as follows for allocation of net income:

(a)Partners will receive the following compensation allowances per month: Matthew, $3,150; Michael, $2,625; Maxwell, $2.200; and Morgan, $2,000.

(b)Unchanged.

(c)Matthew, Michael, Maxwell, and Morgan are to receive bonuses of 12%, 12%, 10%, and 10%, respectively, of net income after the compensation allowances, interest, and bonuses. Negative bonuses are not allowed.

(d)Remainder of profit to be allocated equally among the four partners.

(e)Remainder of loss to be allocated 35:30:25:10 to Matthew, Michael, Maxwell, and Morgan.

Net partnership income for 2017 was $236,250.

REQUIREMENTS:

For each year of data, prepare journal entries as necessary to record formation of the partnership, admission of new partners, and closing of the income summary and drawing accounts. Also prepare a Schedule of Allocation of Net Income and a Statement of Partners’ Capital for each year. USE GOOD FORMAT, and show all calculations. Show a single, cumulative (from 2015 through 2017) T-account for each partner’s Capital account.

Answer 1

Sr. No	Particulars	Debit Amount (In Dollars)	Credit Amount (In Dollars)
	FOR FORMING PARTNERSHIP (IN 2015)
	CASH A/C DR PROPERTY A/C DR          TO METHEW CAPITAL A/C	100250 78750	179000
	CASH A/C DR EQIPMENT A/C DR SOFTWARE A/C DR OFFICE EQIPMENT A/C DR        TO MICHEAL CAPITAL A/C	99750 21000 23500 26250	170500
	DURING THE YEAR (1 JUNE 2015 TO 31ST MAY 2016)
	MICHEAL A/C DR METHEW A/C DR       TO DRAWING	16500 16500	32400
	COMPANSATION ALLOWANCE A/C DR      TO METHEW CAPITAL A/C	31500	31500