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Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124
Textbook Problem

Financial statements for partnerships

The ledger of Camila Ramirez and Ping Xue, attorneys-at-law, contains the following accounts and balances after adjustments have been recorded on December 31, 20Y2:

images

The balance in Xue’s capital account includes an additional investment of $20,000 made on May 5, 20Y2.

Instructions

  1. 1. Prepare an income statement for 20Y2, indicating the division of net income. The partnership agreement provides for salary allowances of $50,000 to Ramirez and $65,000 to Xue, allowances of 12% on each partner’s capital balance at the beginning of the fiscal year, and equal division of the remaining net income or net loss.
  2. 2. Prepare a statement of partnership equity for 20Y2.
  3. 3. Prepare a balance sheet as of the end of 20Y2.

1.

To determine

Prepare income statement for 20Y2, indicating the division of the income.

Explanation

Partnership: It is that form of organization which is owned and managed by two or more persons who invest and share the profits and losses according to a pre-determined ratio.

The income statement for 20Y2 of R&X is as follows:

R&X
Income Statement
For the Year Ended December 31, 20Y2
Professional fees $555,300
Operating expenses:  
     Salary expense$384,900 
     Depreciation expense—building$12,900 
     Heating and lighting expense$10,500 
     Depreciation expense—office equipment$6,300 
     Property tax expense$3,200 
     Supplies expense$3,000 
     Miscellaneous expense$2,500 
           Total operating expenses $423,300
Net income $132,000

 Table (1)

Hence, the net income of R&X for the year 20Y2 is $132,000.

Division of net income:

The following table shows the division of net income between the partners.

 RXTotal
Salary allowance…………………$50,000$65,000$115,000
Interest allowance……………

15,000

(1)

16,200

(2)

$31,200
Remaining income (loss) (1:1)…………-$7,100-$7,100-$14,200
Net income……………$57,900$74,100$132,000

 Table (2)

Working note for the calculation of Interest allowance of R & X

Interest Allowance is at 12%:

Working note 1:

InterestAllowanceofR

2.

To determine

Prepare statement of partnership equity for 20Y2.

3.

To determine

Prepare balance sheet at the end of 20Y2.

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