[NikkiSkupnjak]

I did a SIM on Becker and now I am confused on something. When partners are distributed salary, bonus, interest on capital balances, etc., do these get added to their beginning capital balances? OR are they simply distributions that the partners take away and their balances do not change?

For example the SIM asked:

1. Find total profit distribution to partner H.

2. For Year 2 calculated the change in capital for partners J, S, and H if the bonus method was used and partner C was admitted.

On January 1, Year 1, Johnson (J), Smith (S), and Henry (H) formed a legal services partnership. Initially, J contributed $12,000,000, S contributed $18,000,000, and H contributed $30,000,000 for a partnership profit and loss sharing ratio of 20%, 30%, and 50%, respectively. As part of the original partnership agreement, the partnership will pay H an annual salary of $100,000 for overseeing daily business activity. In addition, the partners agreed H should receive a 10% guaranteed bonus of any partnership profits prior to distributing any earnings to the individual partners. The partnership will pay interest of 2% on the partners’ capital balances at each fiscal year end. The partnership generated net profit of $4,000,000 during its first year of operations.

At the beginning of Year 2 the partnership admitted Cunningham (C) as an additional partner. As part of the agreement, Cunningham provided a capital contribution of $20,000,000 in return for a 20% partnership interest.

1. I got correct, $2,250,000 after adding all of the changes to partner H

2. I got wrong because I used the changes in balances from Year 1 to the partners and carried them forward when using the bonus method in Year 2. (So Partner H started with 30,000,000 and I added the distribution of 2,250,000 to get his year 2 balance and same for other partners)

The solution used their beginning balances of $12M, $18M, $30M and then did the bonus method.

So is this the correct way of doing it? I thought the distributions add to capital and only drawings lower capital. Some of the multiple choice used this idea.

Anything helps, thanks 🙂

FAR 92
AUD 99
REG 94
BEC

Becker Self-Study, Wiley Test Bank

[Almost Done]

So… my answer,

J:12,926,000

S:19,389,000

H:33,965,000

C:16,570,000

Is that what you got for Year 2 capital balances? I agree that there was no mention of drawings on partnership capital so don't reduce the balances.

BEC: Passed
REG: Passed
FAR: Passed
AUD: Passed

[NikkiSkupnjak]

Thanks for replying, For the beginning of Year 1 I had H Capital 32,250,000, S Capital 19,050,000, J Capital 12,700,000 (which totals to 64,000,000 not the 60,000,000 that Becker uses for the Bonus Method). Then Year 2 for the entry I got:

Cash 20,000,000 DR

Capital J 640,000 CR

Capital S 960,000 CR

Capital H 1,600,000 CR

Capital C 16,800,000 CR

I got slightly different answers for their end balances at Year 2 but I mainly just wanted to know the rule of do we add distributions or not. I agree with you that there was no mention of drawings

FAR 92
AUD 99
REG 94
BEC

Becker Self-Study, Wiley Test Bank

[Almost Done]

Yes, on second look I accidentally attributed the bonus based on 84m (instead of the 64, I added the new partners capital). Not a good thing since I'm taking far on Thursday. So i believe your answer to be correct. Anyway, if they don't mention drawings, personally I wouldn't deduct them. Does anyone else want to weigh in on this?

BEC: Passed
REG: Passed
FAR: Passed
AUD: Passed

[J]

I hope that I'm not missing something, but conceptually you are going about the problem correctly. You should allocate Year 1 income based on the partnership agreement (i.e. salary/bonus/interest/residual). Those amounts would go into the individual partners' capital accounts upon closing in Year 1 (as a side note, assuming this is all ordinary income, these amounts are what would be reported on the partners' K-1's and are included as taxable income in Year 1 on the partners' individual returns). If no withdrawals occurred and no additional investments were made during Year 1, ending capital balances for Year 1 (and hence beginning capital for Year 2) would be the beginning Year 1 balance plus allocated Year 1 income. Subsequently you should use those amounts for partnership admission in Year 2.

[Almost Done]

@interfc1 thanks for the clarification, helps quite a bit

BEC: Passed
REG: Passed
FAR: Passed
AUD: Passed

[Author]

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