Kat and edd formed the k e partnership several years ago capital account balances on january 1 2016 were as follows kat
496750 edd 268250 the partnership agreement provides kat with an annual salary of 10000 plus a bonus of 5
percent of

Question

Kat and Edd formed the K & E partnership several years ago. Capital account balances on January 1, 2016, were as follows: Kat .......$496,750 Edd .......$268,250 The partnership agreement provides Kat with an annual salary of $10,000 plus a bonus of 5 percent of partnership net income for managing the business. Edd is provided an annual salary of $15,000 with no bonus. The remainder is shared evenly. Partnership net income for 2016 was $30,000. Edd and Kat each invested an additional $5,000 during the year to finance a special purchase. Year-end drawing account balances were $15,000 for Kat and $10,000 for Edd. REQUIRED

Prepare an income allocation schedule.

Create the journal entries to update the equity accounts at the end of the year.

Determine the capital balances as of December 31, 2016.

Andrea · Answer

Below is one acceptable solution that shows the income allocation, the necessary journal entries, and the computation of year‐end capital balances.

Step 1. Income Allocation Schedule

The partnership agreement provides that:

Kat receives a fixed salary of $10,000 plus a bonus of 5% of net income.
Edd receives a fixed salary of $15,000.
The remaining profit is shared equally.

Given:

Partnership net income for 2016 = $30,000.

Compute Kat’s Bonus:

$ext{Bonus for Kat} = 5\% imes \$30,000 = \$1,500.$

Total “fixed” amounts:

Kat’s total fixed amount = Salary + Bonus = $10,000 + $1,500 = $11,500.
Edd’s salary = $15,000.

Total fixed amounts = $11,500 + $15,000 = $26,500.

Remaining profit to be shared equally:

$ext{Remaining profit} = \$30,000 - \$26,500 = \$3,500,$

so each gets

$ext{Residual share} = \frac{\$3,500}{2} = \$1,750.$

Thus, final allocated income:

Kat: $10,000 + $1,500 + $1,750 = $13,250.
Edd: $15,000 + $1,750 = $16,750.

Check: $13,250 + $16,750 = $30,000.

Step 2. Journal Entries for 2016

Assume that at the beginning of the year the partners’ capital balances are as follows:

Kat Capital, January 1, 2016: $496,750
Edd Capital, January 1, 2016: $268,250

(a) Record the Allocation of Net Income

Entry 1 – Allocation of Partnership Net Income

   Dr. Income Summary                   30,000
         Cr. Kat, Capital                              13,250
         Cr. Edd, Capital                              16,750

This entry allocates the $30,000 net income to Kat and Edd according to the schedule above.

(b) Record Additional Investments

Each partner invested an additional $5,000 during the year.

Entry 2 – Additional Investment

   Dr. Cash                              10,000
         Cr. Kat, Capital                               5,000
         Cr. Edd, Capital                               5,000

(c) Record Partner Drawings

At year end, drawings were:

Kat withdrew $15,000.
Edd withdrew $10,000.

Entry 3 – Record Drawings

   Dr. Kat, Drawing                      15,000
   Dr. Edd, Drawing                      10,000
         Cr. Cash                                     25,000

Note: Drawings reduce the capital accounts (they are closed to Capital at year end).

Step 3. Determine Year‐End Capital Balances

Start with the beginning balances, add the allocated net income and additional investments, then subtract drawings.

For Kat:

Beginning capital: $496,750
Add allocated net income: $13,250
New balance = $496,750 + $13,250 = $510,000
Add additional investment: $5,000
New balance = $510,000 + $5,000 = $515,000
Subtract drawings: $15,000
Year‐end capital = $515,000 – $15,000 = $500,000

For Edd:

Beginning capital: $268,250
Add allocated net income: $16,750
New balance = $268,250 + $16,750 = $285,000
Add additional investment: $5,000
New balance = $285,000 + $5,000 = $290,000
Subtract drawings: $10,000
Year‐end capital = $290,000 – $10,000 = $280,000

Final Answers

(a) Income Allocation Schedule

Item	Kat	Edd	Total
Fixed Salary	10,000	15,000	25,000
Kat’s Bonus (5% of $30,000)	1,500	–	1,500
Residual Profit (shared equally)	1,750	1,750	3,500
Total Allocated Income	13,250	16,750	30,000

(b) Journal Entries:

Allocation of Net Income:

   Dr. Income Summary              30,000
         Cr. Kat, Capital                          13,250
         Cr. Edd, Capital                          16,750

Additional Investments:

   Dr. Cash                        10,000
         Cr. Kat, Capital                           5,000
         Cr. Edd, Capital                           5,000

Record Drawings:

   Dr. Kat, Drawing                15,000
   Dr. Edd, Drawing                10,000
         Cr. Cash                                 25,000

(c) December 31, 2016 Capital Balances:

Kat: $500,000
Edd: $280,000

This completes the solution.

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