Problem 3

Salem and Durham entered into a partnership to provide supply chain management and logistic services in the Silicon Valley region of California.

In their agreed Articles of Partnership, the partners acknowledged the following:

1. Sharing of profits and losses:

1. Compensate each partner $125 per hour for their billable hourly consulting work performed.
2. Salem receives an additional $3,000 monthly as the partnerships Chief Operating Officer (COO);
3. Durham receives an additional $2,500 monthly as the partnerships Chief Technology Officer (CTO),
4. Any remaining profits or losses are divided equally between the partners.

2. Each partner is permitted but not required to withdraw no more than $800 per month from the partnership and such withdrawals will be accounted for as direct reductions of the withdrawing partners capital balance.
3. They will begin their partnership with equal beginning capital balances.

On January 1, 20x1, when they formed the partnership, each partners contributions were as follows:

1. Salem invested cash of $50,000.
2. Durham invested $140,000 in cash and she invested office equipment with a book value of $10,000 and fair value of $25,000.
3. In recognition of Salems expertise in supply chain management and distribution logistics, the partners have agreed to begin their partnership with equal capital balances, as noted in the partnership agreement above.

For fiscal year-ending 20x1, the total partnership's net income was $410,000.

Additionally, in 20x1, Salem worked 1,100 billable partnership hours, and Durham worked 1,500 billable hours.

Lastly, each partner withdrew their allotted $800 per month throughout 20x1.

Required

1. Using the bonus method, prepare the initial journal entry to establish the two partners investment in the partnership.
2. For fiscal year-ending 20x1, prepare a schedule showing the allocation of 20x1 profit and losses, withdrawals, and other related activity to each partners capital account.
3. For fiscal year-ending 20x1, prepare a schedule showing the balance in each partners capital account at the end fiscal year 20x1.
4. Assume that on 1/1/20x2, Walter Winston invests $100,000 in exchange for a 20% interest in the partnership. Salem and Durhams partnership sharing ratios then are 40% each.
   1. Using the bonus method, prepare a journal entry admitting Winston into the partnership. Any bonus is allocated based on the partnership profit and loss sharing ratio.
5. Prepare a schedule showing the balance of each partners capital account, after admitting Walter Winston.