Problem 4 Partnerships 50 minutes 38 marks

PART 1

On January 1, 2020, Harry, Ron and Hermione formed a partnership by all contributing cash. Harry contributed $45,000, Ron contributed $20,000 and Hermione contributed $35,000.

According to the partnership agreement, the partners decide to share the profits and losses as follows:

All three partners receive a salary allowance of $85,000

No interest allowances are distributed

All remaining profits and losses are distributed: Harry - 40%, Ron 15%, Hermione 45%

On December 31, 2020, the partnerships first year-end, the company had a profit of $315,000.

Required:

1. Prepare the journal entries on January 1, 2020 to establish the partnership.

2. Complete the partnership income allocation table in order to determine how the $315,000 profit for 2020 will be distributed amongst the partners.

3. Prepare the journal entries on December 31, 2020 to distribute the profits.

4. Update the partners individual partners T-accounts.

PART 2

On January 2, 2021, Ron decides to leave the partnership and agrees to accept $100,000 cash from the partnership upon his departure. According to the partnership agreement, any bonuses to the remaining partners should be divided 50:50.

Required:

1. Prepare the journal entry on January 2, 2021 to record Rons withdrawal from the partnership. Use the balance in Rons capital account calculated above to determine if anyone is receiving a bonus in this situation.