Problem 144 LO 2 9 Exiting partners under the bonus method and liquidation Midway Construction was a partnership owned by Davis Murray and Clay with yearend 2013 capital balances of 50000 80000 and 70000 respectively Davis and Murray each received an annual salary of 100000 Clay was primarily involved in sales and received a salary of 70000 and a bonus of 20 of net income after salaries All remaining profits were allocated equally among the partners In the event of insufficient income or operat ing losses each provision of the agreement would be satisfied to whatever extent possible given the order of salaries interest bonus and percentages Salaries are distributed at the end of each calendar quarter and Clays bonus is distributed at the end of the first month subsequent to yearend Eighty percent of all other allocated income income other than salary and bonus is distributed to the partners at the end of the first quarter subsequent to yearend During 2013 the partnership had net income of 450000 and proceeded to construct a number of spec homes during 2014 Unfortunately during 2014 interest rates increased and the economy experienced a signifi cant slowdown resulting in partnership income of only 300000 In order to improve cash flows on January 1 2015 Rayburn made a capital contribution to the partnership of 59000 cash and received a 50 interest in capital Rayburn would receive a profit allocation equal to interest of 5900 in 2015 and a 10 profit percentage In 2016 Rayburn would receive inter est of 10 on average capital before allocation of 2016 profits and a 10 profit allocation The previous partners profit and loss agreement was modified to provide for salaries at onehalf of previous levels none of which were to be distributed and profit percentages of 30 each All other aspects of the previous profitsharing agreement remained in effect During the year 2015 conditions worsened and the partnership reported income of 142000 At yearend 2015 Davis sold its capital interest to the partnership in exchange for 49400 and received no further distributions At the beginning of 2016 Murray loaned the partnership 50000 with the necessary loan documents providing for interest at the rate of 6 The profitsharing agree ment for 2013 was completely changed to simply provide for interest on capital to Rayburn as previously set forth and all remaining profits to be allocated 40 40 and 20 for Murray Clay and Rayburn respectively The only withdrawal to take place during 2016 was the distri bution of Clays 2015 bonus The partnership could no longer sustain the economic downturn and the decision was made to liquidate the partnership after having reported net income of 110000 during the fir