Carlton Weber and Stansbury share profits equally and have capital
Carlton, Weber, and Stansbury share profits equally and have capital balances of $120,000, $70,000, and $80,000, respectively, as of December 31, 2014. Effective January 1, 2015, Stansbury has transferred his interest in the partnership to Laidlaw for total consideration of $100,000. As part of agreeing to admit Laidlaw to the partnership, the profit- and loss-sharing agreement was modified as follows:
a. Carlton, Weber, and Laidlaw would receive annual salaries of $120,000, $90,000, and $90,000, respectively, to be withdrawn in equal amounts at the end of each calendar quarter.
b. A bonus of 20% of net income after the bonus will be allocated between Weber and Laidlaw in the ratio of 1 to 3. The bonus would be distributed at the end of the first quarter subsequent to year-end.
c. Profit and loss percentages are 40%, 30%, and 30%, respectively, for Carlton, Weber, and Laidlaw.
d. If income is not sufficient or an operating loss exists, all provisions of the profit-sharing agreement are to be satisfied, and the profit and loss percentages are used to absorb any deficiency or additional losses.
The original partners were excited about the new arrangement because Laidlaw had indicated that they would be able to attract a number of customers from his previous place of employment. Weber was willing to shift some salary to a bonus status in order to capture more of the upside potential being presented by Laidlaw. As expected, over the first six months of 2015, a number of Laidlaw’s previous customers transferred their business to the partnership.
However, the next 12 months were very disappointing. Not only did very few additional Laid-law customers transfer their business, but it became clear that Laidlaw was not compatible with the other partners. Furthermore, a number of long-standing customers ceased doing business with the company due to issues with Laidlaw. Income for the year 2015 was $300,000, and income for the first six months of 2016 was only $120,000.
On July 1, 2016, Carlton and Weber agreed to acquire Laidlaw’s interest in the partnership. The transaction would be recorded as a purchase of Laidlaw’s interest by the partnership under the bonus method. Laidlaw was paid $79,000 for their capital balance as of June 30, 2016, and no other distributions were made to him.
After Laidlaw left the partnership, Carlton and Weber went back to sharing profits and losses equally with quarterly withdrawals of $10,000 per partner at the end of each calendar quarter. Weber agreed not to receive an additional distribution traceable to the bonus earned during the first six months of 2016. Income in the second half of 2016 was $73,000. However, the partners realized that they needed to expand operations if the company was to be saved. On January 1, 2017, the partnership admitted Wilson. Wilson contributed tangible assets of $70,000 and intangibles to the partnership in exchange for a 40% interest in capital and one-third interest in profits.
The admission of Wilson was recorded using the goodwill method. Carlton, Weber, and Wilson continued to share profits equally, and the partnership experienced net income of $420,000 in 2017. Quarterly withdrawals of $30,000 were paid to each of the partners beginning in 2017.
During the first six months of 2018, the partnership had net income of $255,000 in spite of Carlton’s reduced involvement due to health Problems. On July 1, 2018, Carlton sold his interest to the partnership for $160,000. The sale was recorded by recognizing the goodwill traceable to the entire partnership.
Prepare a schedule analyzing the changes in partners’ capital accounts since December 31, 2014. Supporting calculations should be in good form.
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