ACCY112 Spring 2013-Week 8

Questions: DQ15.8; EQ15.6; PQ15.3; PQ15.6

8.

Hannah and Jeremy set up a partnership to run a caf. At the time of establishing the business
Hannah was in a better financial position than Jeremy and so contributed 60% of the capital
required. Jeremy believes that he contributes as much effort to running the caf as Hannah and
thereforeassumesthatanyprofitmadewillbedistributedevenlybetweenHannahandhimasthey
are partners. Is Jeremy correct and what factors might determine how much profit each of the
partnerswillreceive?

Jeremyiscorrectthatintheabsenceofanagreementorifthepartnersareunabletoreachan
agreement,thePartnershipActprovidesthatprofitsaretobedividedequally,regardlessofthe
amountinvestedbythepartners.
Factorsthatmightdeterminehowmuchprofiteachpartnerwillreceiveinclude:
returnforthepersonalservicesperformedbythepartners
returnonthecapitalprovidedbythepartners
returnforthebusinessrisksassumedbythepartners
The profit and loss agreement should reward each partner for resources and services
contributedtothebusiness
As the partners contribute thesameeffort butHannahcontributed more capital,andthenit
wouldbefairforHannahtogetmorethanhalfoftheshareoftheprofits.

Page1of5


Exercise15.6
Allocationofnetprofit:LAINGANDLOWRY
Required:
A. Preparethejournalentriestorecordtheallocationofnetprofitundereachofthefollowingassumptions,
usingmethod1procedures:

1. LaingandLowryagreetoa55:45sharingofprofits.

2. Thepartnersagreetoshareprofitsintheratiooftheiroriginalcapitalinvestments.

3. The partners agree to recognise $12 000 per year salary allowance to Laing and a $4500 per year
salary allowance to Lowry. Each partner is entitled to 6% interest on his original investment, and any
remainingprofitisbesharedequally.
B. RepeatrequirementA3aboveassumingthepartnershiphasanetprofitof$27000forthefirstyear.
Answer:
A.
1

Profit&LossSummary
$40500

ProfitDistribution
$40500

ProfitDistribution
40500

Laing,Capital
22275

Lowry,Capital
18225

1. $40500x0.55 =
$22275

$40500x0.45 =
$18225

2. Laing
Lowry

3.

$120000
$90000
$210000

SalaryAllowance
InterestonCapitals(6%)

Remainder
Total

2
$40500

(4/7)x$40500
(3/7)x$40500

Laing
$12000
7200
19200
5700
$24900

40500

$40500

23143
17357

=
=

Lowry
$4500
5400
9900
5700
$15600

$40500

40500

$23143
$17357
$40500
Total
$16500
12600
29100
11400
$40500

B.

ProfitandLossSummary

ProfitDistribution

ProfitDistribution

Laing,Capital

Lowry,Capital

$27000

27000

$27000

18150*
8850*

SalaryAllowance
InterestonCapitals(6%)

Excessallocation(loss)
*Total

Laing
$12000
7200
19200
(1050)
$18150

Page2of5

Lowry
$4500
5400
9900
(1050)
$8850

Total
$16500
12600
29100
(2100)
$27000

$40500

24 900
15600


Problem15.3
Allocationofprofitandloss:JONGANDJOY
Required:
A. Determinethedivisionoftheprofitorlossassumingaprofitof$120000.
B. Determinethedivisionoftheprofitorlossassumingaprofitof$60000.
C. Determinethedivisionoftheprofitorlossassumingalossof$6000.

A.

Jong
Joy
Profitof$120000
Plan(a) Ratioof50:50

$60000

$60000

20000
42000
$62000

30000
28000
$58000

Plan(c) Salary

Interestat8%onoriginalinvestment

Remainderequally

7200
41500
$48700

25000
4800
41500
$71300

Plan(d) Ratioofinitialinvestments(9:6)

$72000

$48000

Plan(b) Salaries

Remainder6:4

1515

B.

Profitof$60000
Plan(a) Ratioof50:50

Plan(b) Salaries

Excessallocation6:4

Plan(c)

Salary
Interestat8%onoriginalinvestment
Totalsalaryandinterest
Remainderequally

Plan(d) Ratioofinitialinvestment(9:6)
1515

Joy

$30000

$30000

20000
6000
$26000

30000
4000
$34000

7200
7200
11500
$18700

25000
4800
29800
11500
$41300

$36000

$24000

Page3of5

Jong

C.

Jong

Lossof$6000
Plan(a) Ratioof50:50

Joy

$(3000)

$(3000)

Plan(b) Salaries

Excessallocation6:4

20000
(33600)
$(13600)

30000
(22400)
$7600

Plan(c)

7200
7200
(21500)
$(14300)

25000
4800
29800
(21500)
$8300

$(3600)

$(2400)

Salary
Interestat8%onoriginalinvestment
Totalsalaryandinterest
Excessallocationequally

Plan(d) Ratioofinitialinvestment(9:6)

1515

Problem15.6
Formationandallocationofprofits method1

LLOYDANDSCHULZ

Required:
A. Preparethejournalentriestorecordtheinitialinvestmentsofbothpartners.(ignoreGST.)
B. PrepareaBalanceSheetasat1October2012.
C. Prepareastatementofpartnersequityfortheyearended30September2013.

A.
1/10/2012
CashatBank
$28000

MarketableSecurities
26800

AccountsReceivable
47000

Inventory
125400

Equipment
230000

AccountsPayable
$36000

Lloyd,Capital
421200

Building
820000

Land
350000

MortgagePayable
456000

Schulz,Capital
714000

Page4of5

B.
LLOYDANDSCHULZ
BalanceSheet
asat1October2012
CURRENTASSETS
Cashatbank
Marketablesecurities
Accountsreceivable
Inventory
TOTALCURRENTASSETS
NONCURRENTASSETS
Equipment
Building
Land
TOTALNONCURRENTASSETS

$28000
26800
47000
125400

230000
820000
350000

CURRENTLIABILITIES
Accountspayable
TOTALCURRENTLIABILITIES
NONCURRENTLIABILITIES
Mortgagepayable
TOTALNONCURRENTLIABILITIES
TOTALLIABILITIES
NETASSETS

36000

456000

PARTNERSEQUITY
Capital,Lloyd
Capital,Schulz
TOTALPARTNERSEQUITY

421200
714000

$227200

1400000
$1627200

36000

456000
$492000
$1135200

$1135200

C.
LLOYDANDSCHULZ
StatementofChangesinPartnersEquity(Method1)
fortheyearending30September2013

Lloyd
Schulz
Capitalbalances1/10/12
$421200 $714000
Add: Additionalinvestment
60000
115200

Profitallocation
53076
35384

534276
864584
Less: Drawings
45000
17200
Capitalbalances30/9/13
$489276 $847384

Page5of5

Total
$1135200
175200
88460
1398860
62200
$1336660