
In the early part of 2018, the partners of Hugh, Jacobs, and Thomas sought assistance from a local accountant. They had begun a new business in 2017 but had never used an accountant’s services.
Hugh and Jacobs began the
- Each partner was to be allocated 10 percent interest computed on the beginning capital balances for the period.
- A compensation allowance of $5,000 was to go to Hugh with a $25,000 amount assigned to Jacobs.
- Any remaining income would be split on a 4:6 basis to Hugh and Jacobs, respectively.
In 2017, revenues totaled $175,000, and expenses were $146,000 (not including the partners’ compensation allowance). Hugh withdrew cash of $9,000 during the year, and Jacobs took out $14,000. In addition, the business paid $7,500 for repairs made to Hugh’s home and charged it to repair expense.
On January 1, 2018, the partnership sold a 15 percent interest to Thomas for $64,000 cash. This money was contributed to the business with the bonus method used for accounting purposes.
Answer the following questions:
- Why was the original
profit and loss allocation, as just outlined, designed by the partners? - Why did the drawings for 2017 not agree with the compensation allowances provided for in the partnership agreement?
- What journal entries should the partnership have recorded on December 31, 2017?
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