Question
On January 1, 2010, Heyman invests $40,000 cash and inventory costing $15,000 but with a current appraised value of only $12,000. Mullins contributes a building
On January 1, 2010, Heyman invests $40,000 cash and inventory costing $15,000 but with a current appraised value of only $12,000. Mullins contributes a building with a $40,000 BV and $48,000 FV. The partnership also accepts responsibility for a $10,000 note payable owned in connection with the building. The partners agree to begin operations with equal capital balances. The articles of partnership also provide that each year-end, profits and losses are allocated as follows: 1. For managing the business, Heyman is credited with a bonus of 10% of partnership income after subtracting the bonus. No bonus is accrued if the partnership records a loss. 2. Both partners are entitled to interest equal to 10% of the average monthly capital balance for the year without regard for the income or drawings for that year. 3. An remaining profit or loss is divided 60% of Heyman and 40% to Mullins 4. Each partner is allowed to withdraw $800 per month in cash from the business. On October 1, 2010, Heyman invested an additional $12,000 cash in the business. For 2010, the partnership reported income of $33,000. Lewis, an employee, is allowed to join the partnership on Jan. 1, 2011. The new partner invests $66,000 directly into the business for a one-third interest in the partnership property. The revised partnership agreement still allows for both the bonus to Heyman and the 10% interest, but all remaining P/L are now split 40% each to Heyman and Lewis and 20% to Mullins. Lewis is also entitled to the $800 per month drawings. Mullins chooses to withdraw from the partnership a few years later. After negotiations, all partners agree that Mullins should be paid a $90,000 settlement. The capital balances at that time were as follows: Heyman, Capital $88,000 Mullins, Capital $78,000 Lewis, Capital $72,000 Required: (a) Assume that the partnership uses the BONUS method make all JE except for monthly drawings. (b) Assume that the partnership uses the GOODWILL method make JE except drawing
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