Fallon and Springer formed a partnership on January 1. Fallon contributed $90,000 cash and equipment with a market value of $60,000. Springer’s investment consisted of: cash, $30,000; inventory, $20,000; all at market values. Partnership net income for Year 1 and Year 2 was $75,000 and $120,000, respectively.

126. Fallon and Springer formed a partnership on January 1. Fallon contributed $90,000 cash and equipment with a market value of $60,000. Springer’s investment consisted of: cash, $30,000; inventory, $20,000; all at market values. Partnership net income for Year 1 and Year 2 was $75,000 and $120,000, respectively.
1. Determine each partner’s share of the net income for each year, assuming each of the following independent situations:

(a) Income is divided based on the partners’ failure to sign an agreement.
(b) Income is divided based on a 2:1 ratio (Fallon: Springer).
(c) Income is divided based on the ratio of the partners’ original capital investments.
(d) Income is divided based on interest allowance of 12% on the original capital investments; salary allowance to Fallon of $30,000 and Springer of $25,000; and the remainder to be divided equally.

2. Prepare the journal entry to record the allocation of the Year 1 income under alternative (d) above.

Part 1: Calculation of partners’ capital contributions:

Fallon Springer Total
Cash $90,000 $30,000 $120,000
Equipment 60,000 60,000
Inventory 20,000 20,000
Total contribution $150,000 $50,000 $200,000

Year 1 Year 2
Net income: $75,000 Net income: $120,000
Fallon Springer Fallon Springer
(a) Net income distributed on a 1:1 basis $37,500 $37,500 $60,000 $60,000
(b) Net income distributed on a 2:1 basis $50,000 $25,000 $80,000 $40,000
(c) Net income distributed based on ratio of original capital investments (75:25) $56,250 $18,750 $90,000 $30,000

(d) Year 1 Year 2
Fallon Springer Total Fallon Springer Total
Net income $75,000 $120,000
Salary $30,000 $25,000 (55,000) $30,000 $25,000 (55,000)
12% interest allowance 18,000 6,000 (24,000) 18,000 6,000 (24,000)
Balance of income (4,000) 41,000
Remainder allocated (2,000) (2,000) 4,000 20,500 20,500 (41,000)
Total $46,000 $29,000 $0 $68,500 $51,500 $0

Part 2:

Dec. 31 Income summary 75,000
Fallon, Capital 46,000
Springer, Capital 29,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss

127. Lin and Coral invested $99,000 and $126,000, respectively, in a partnership they began one year ago. Assuming the partnership earned $120,000 during the current year; compute the share of the net income each partner should receive under each of these independent assumptions.

1. The partnership contract specifies salary allowances of $45,000 to Lin and $60,000 to Coral, and any balance shared equally.

Lin Coral Allocated
Net Income
Salary allowance
Remainder
Allocation of remainder
Total

2. The partnership contract specifies salary allowances of $45,000 to Lin and $60,000 to Coral, interest allowance of 10% on the partners’ beginning capital balance for the year.

Lin Coral Allocated
Net Income
Salary allowance
Interest allowance
Remainder
Allocation of remainder
Total

Part 1

Lin Coral Allocated
Net income $120,000
Salary allowance $45,000 $60,000 (105,000)
Remainder 15,000
Allocation of remainder 7,500 7,500 (15,000)
Total $52,500 $67,500 $0

Part 2:

Lin Coral Allocated
Net income $120,000
Salary allowance $45,000 $60,000 (105,000)
Interest Allowance
$99,000 × 0.10 9,900 (9,900)
$126,000 × 0.10 12,600 (12,600)
Remainder $(7,500)
Allocation of remainder (3,750) (3,750) 7,500
Total $51,150 $68,850 $0

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss

128. Glade, Marker, and Walters are partners with beginning-year capital balances of $100,000, $50,000, and $50,000, respectively. Partnership net income for the year is $84,000. Make the necessary journal entry to close Income Summary to the capital accounts if:

a. Partners agree to divide income based on their beginning-year capital balances.
b. Partners agree to divide income based on the ratio of 5:3:2 (Glade:Marker:Walters), respectively.
c. Partnership agreement is silent as to division of income and less.

(a) Income Summary 84,000
Glade, Capital ($84,000 × ($100,000/$200,000)) 42,000
Marker, Capital ($84,000 × ($50,000/$200,000)) 21,000
Walters, Capital ($84,000 × ($50,000/$200,000)) 21,000

(b) Income Summary 84,000
Glade, Capital ($84,000 × 5/10) 42,000
Marker, Capital ($84,000 × 3/10) 25,200
Walters, Capital ($84,000 × 2/10) 16,800

(c) Income Summary 84,000
Glade, Capital ($84,000 × 1/3) 28,000
Marker, Capital ($84,000 × 1/3) 28,000
Walters, Capital ($84,000 × 1/3) 28,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss

129. Glade, Marker, and Walters are partners with beginning-year capital balances of $250,000, $150,000, and $100,000, respectively. Partnership net income for the year is $192,000. Make the necessary journal entry to close Income Summary to the capital accounts if partners agree to divide income based on their beginning-year capital balances.

(a) Income Summary 192,000
Glade, Capital ($192,000 × ($250,000/$500,000)) 96,000
Marker, Capital ($192,000 × ($150,000/$500,000)) 57,600
Walters, Capital ($192,000 × ($100,000/$500,000)) 38,400

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss

130. Jakobs, Penn, and Lundt are partners with beginning-of-year capital balances of $400,000, $320,000, and $160,000, respectively. The partners agreed to share income and loss as follows: Salary of $30,000 to Jakobs, $50,000 to Penn, and $36,000 to Lundt. An interest allowance of 8% on beginning-of-year capital balances. Any remaining balance is to be divided equally. If partnership net income for the year is $190,000, determine each partner’s share and make the appropriate journal entry to close the Income Summary to the capital accounts.

Jakobs Penn Lundt Allocated
Income $190,000
Salary allowance $30,000 $50,000 $36,000 (116,000)
Interest at 8% 32,000 25,600 12,800 (70,400)
Remainder $3,600
Balance allocated 1,200 1,200 1,200 ($3,600)
Total $63,200 $76,800 $50,000 $0

Income Summary 190,000
Jakobs, Capital 63,200
Penn, Capital 76,800
Lundt, Capital 50,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss

131. Darien and Hayden agree to accept Kevin into their partnership. Kevin will contribute $22,000 in cash. Prepare the journal entry to record this transaction.

Cash 22,000
Kevin, Capital 22,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-P3 Account for the admission and withdrawal of partners.
Topic: Admission and Withdrawal of Partners

132. Palmer withdraws from the FAP Partnership. The remaining partners agree to buy out her share for her capital balance of $65,000. Prepare the journal entry to record the withdrawal from the partnership.

Palmer, Capital 65,000
Cash 65,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-P3 Account for the admission and withdrawal of partners.
Topic: Admission and Withdrawal of Partners

133. Lemon and Parks are partners. On October 1, Lemon’s capital balance is $75,000, and Parks’ capital balance is $125,000. With the partnership’s approval, Parks sells ½ of his partnership interest to Tambling for $70,000. Prepare the journal entry to record this transaction in the partnership records.

Parks, Capital 62,500
Tambling, Capital 62,500

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-P3 Account for the admission and withdrawal of partners.
Topic: Admission and Withdrawal of Partners

134. Leto and Duncan allow Gunner to purchase a 25% interest in their partnership for $30,000 cash. Gunner has exceptional talents that will enhance the partnership. Leto’s and Duncan’s capital account balances are $55,000 each. The partners have agreed to share income or loss equally. Prepare the general journal entry to record the admission of Lepley to the partnership.

Cash 30,000
Leto, Capital 2,500
Duncan, Capital 2,500
Gunner, Capital 35,000

Existing partnership capital = $110,000; $110,000 + Gunner investment of $30,000 = $140,000; $140,000 * 25% = $35,000. Gunner receives a bonus of $5,000 split evenly between Leto and Duncan.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-P3 Account for the admission and withdrawal of partners.
Topic: Admission and Withdrawal of Partners