Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Initial Contributions: 1 ) Andrew would contribute a retail space he purchased a number of years ago into the business. The building was originally purchased

Initial Contributions:
1) Andrew would contribute a retail space he purchased a number of years ago into the business. The building was originally purchased for $200,000($150,000 was allocated to land and $50,000 was allocated to the building when originally purchased). They estimated current fair value of the property is $350,000($75,000 to building and $275,000 to the land). The property has a note payable secured by the land with a balance of $60,000. The partnership will assume the remaining loan balance.
2) Ayman would contribute various equipment and technology that would be necessary to begin operations. In total, the equipment originally cost Ayman $120,000 and currently has an estimated fair value of $100,000. Ayman will also contribute $80,000 of cash into the business.
3) The partners decide that they will start with capital balances equivalent to 55%(Andrew) and 45%(Ayman). They decide to use the "Bonus Method" to determine their initial individual capital balances.
Distributions:
1) Since Ayman contributed $80,000 of cash, he's able to take monthly cash distributions of $2,000 until he's recouped his initial contribution of $80,000. Each month's distribution is paid on the first of the month.
2) In year's in which the partnership reports net income, Andrew and Ayman can each take annual year-end distributions equal to 10% of their ending capital balances to assist each partner in making their required income tax payments related to their partnership net income. The 10% is to be calculated after all other capital adjustments have been completed for the year (such as dividends and allocating partnership income).
Profit/(Loss) Allocations:
Annual net profit/(loss) shall be allocated to the partners based on the following waterfall:
Provision #1- Ayman shall receive an annual $25,000 "management fee" allocation due to his managing the daily operations of the I.T. business.
Provision #2- Andrew shall receive an "interest" allocation due to contributing a greater amount of assets into the business. The amount allocated shall be 15% of his capital balance as of January 2nd of each year (his 2023 allocation shall be calculated based on his capital balance after initial contributions).
Provision #3- Any remaining profit/(loss) shall be split between Andrew and Ayman 40:60, with 40% to Andrew and 60% to Ayman.
Requirement #1
Determine each partner's initial capital balance and record the journal entry for the partner's initial contributions into the business as of January 1,2023. Note - there may be extra rows shaded in blue, or you may need to add rows.
Date Account Description Debits Credits
1/1/23
Requirement #2
It's now the end of their first year, and the two were smart to start their own business as they're already turning a profit. During 2023, HiloSati, LLP reported net income of $310,000. All available distributions were taken by each partner. Determine each partner's ending capital balance as of December 31,2023.
Capital - Andrew Capital - Ayman
Requirement #3
After their successful first year of operations, the partners decide it's time to expand their operations. In order to do so, they'll need more cash. They reach out to additional Auggie alums (who have been very successful so far in their careers) to see if they're interested in joining their partnership. Reina and Fatuma started their own consulting firm a couple years ago and have been extremely successful, resulting in plenty of excess cash available. Fatuma has her hands full running the daily operations of their business and doesn't have the capacity to join in a new project. But Reina agrees to buy into HiloSati, LLP as an investor, but will not assist in managing the business or daily operations.
The three partners agree on the following terms and amend their partnership agreement accordingly:
Amendments to HiloSati, LLP Partn

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Human Resource Management

Authors: Robert L. Mathis, John H. Jackson

13th Edition

053845315X, 978-0538453158

More Books

Students also viewed these Accounting questions