Gorman and Morton form a partnership on May 1, 2019. Gorman contributes cash of $50,000; Morton conveys title to the following properties to the partnership:

The partners agree to start their partnership with equal capital balances. No goodwill is to be recognized.

According to the articles of partnership written by the partners, profits and losses are allocated based on the following formula:

• Gorman receives a compensation allowance of $1,000 per month.
• All remaining profits and losses are split 40:60 between Gorman and Morton, respectively.
• Each partner can make annual cash drawings of $25,000 beginning in 2020.

Net income of $11,000 is earned by the business during 2019.

Steele is invited to join the partnership on January 1, 2020. Because of her business reputation and financial expertise, she is given a 40 percent interest for $54,000 cash. The bonus approach is used to record this investment, made directly to the business. The articles of partnership are amended to give Steele a $2,000 compensation allowance per month and an annual cash drawing of $20,000. Remaining profits are now allocated:

Gorman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12%

Morton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Steele . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

All drawings are taken by the partners during 2020. At year-end, the partnership reports net income of $86,000.

On January 1, 2021, Frank (previously a partnership employee) is admitted into the partnership.

Each partner transfers 10 percent to Frank, who makes the following payments directly to the partners:

Gorman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,216

Morton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,724

Steele . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,560

Once again, the articles of partnership must be amended to allow for the entrance of the new partner. This change entitles Frank to a compensation allowance of $800 per month and an annual drawing of $14,000. Profits and losses are now assigned as follows:

Gorman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5%
Morton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.5
Steele . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.0
Frank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10.0

For the year of 2021, the partnership earned a profit of $40,000, and each partner withdrew the allowed amount of cash.

Prepare schedules that determine the capital balances for the individual partners as of the end of each year 2019 through 2021.

Transcribed Image Text:

Book Value Falr Value Equipment . $15,000 $28,000 Licensing agreements.... 35,000 36,000