In the early part of 2013, the partners of Page, Childers, and Smith sought assistance from a local accountant. They had begun a new business in 2012 but had never used an accountant’s services.
Page and Childers began the by contributing $80,000 and $30,000 in cash, respectively.
Page was to work occasionally at the business, and Childers was to be employed full-time. They decided that year-end profits and losses should be assigned as follows:
• 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 Page with a $20,000 amount assigned to Childers.
• Any remaining income would be split on a 4:6 basis to Page and Childers, respectively. In 2012, revenues totaled $90,000, and expenses were $64,000 (not including the compensation allowance assigned to the partners). Page withdrew cash of $8,000 during the year, and Childers took out $11,000. In addition, the business paid $5,000 for repairs made to Page’s home and charged it to repair expense.
On January 1, 2013, the sold a 20 percent interest to Smith for $43,000 cash. This money was contributed to the business with the bonus method used for accounting purposes.
Answer the following questions:
a. Why was the original profit and loss allocation, as just outlined, designed by the partners?
b. Why did the drawings for 2012 not agree with the compensation allowances provided for in the agreement?
c. What journal entries should the have recorded on December 31, 2012?
d. What journal entry should the have recorded on January 1, 2013?
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