157 50425 EY211 2012 1 1 1 COMPANY ACCOUNTING LECTURE 4

4- Granting the partners interest on the capital and allocating the rest of net income in a specific ratio.. 5- Granting the partners interest on the capital and salaries and allocatin

Second

:

( ( The allocation of Profits and Losses

How to divide the Profits among the

partners

? ?

The allocation of profits(net income) or losses among partners

depends on the agreement of them and there are many methods

to allocate such as

:

1

- Equally

2

- Using a specific ratio

3

- Using the ratio of capital balances of the partners

4- Granting the partners interest on the capital and allocating the

rest of net income in a specific ratio

5- Granting the partners interest on the capital and salaries and

allocating the rest of net income in a specific ratio

6- Granting the partners interest on the capital , salaries and

bonuses and allocating the rest of net income in a specific ratio

- Allocating the Profits Equally

:

Example(1)

On 1 Jan 2011, A and B formed a general

200,000 for the year ended 31/12/2011 The partners have agreed to share profits and losses equally.

If the profit is distributed equally, we calculate the share of each partner as follows:

= profit ( or loss) / no of partners.

So, the partner’s share = 200000 / 2 = 100000

And the entry is:

Dr Cr

Income Summary 200000

Partner-A- Capital 100000

Partner-B- Capital 100000

- Allocating the Profits using a Specific ratio

:

Example(2)

On 1 Jan 2011, A and B formed a general partnership The partnership realized net income of 300,000 for the year ended 31/12/2011 The partners have agreed to share profits and losses with the ratio 3:1 respectively.



Required

:

Prepare the journal entry to record the allocation of profit.

We calculate the share of each partner as follows:

Partner A Partner B Total

3 1 = 4

So, the partner’s A share = 300000 * ( 3/4) = 225000

So, the partner’s B share = 300000 * (1/4 ) = 75000 300000 And the entry is:

Dr Cr Income Summary 300000

Partner-A- Capital 225000 Partner-B- Capital 75000

On 1 Jan 2011, A and B formed a general partnership The partnership realized net income of 300,000 for the year ended 31/12/2011 The partners have agreed to share profits and losses with the percentage of 70% and 30% respectively.

Required

:

Prepare the journal entry to record the allocation of profit.

We calculate the share of each partner as follows:

Partner A Partner B

70% 30%

So, the partner’s A share = 300000 * 70% = 210000

So, the partner’s B share = 300000 * 30% = 90000 300000

And the entry is:

Dr Cr Income Summary 300000

Partner-A- Capital 210000 Partner-B- Capital 90000

- Allocating the Profits using the capital balances ratio

:



The partners may agree to use the ratio of their capital balances

to allocate the net income ,in this case we can use one of the

following balances

:

1

- The balances of capital at the beginning of the period

.

2

- The balances of capital at the end of the period

Example (4)

On 1 Jan 2011, A and B formed a general partnership The partnership realized net income of 360,000 for the year ended 31/12/2011 The

partners have agreed to share profits and losses using the percentage

capital’s accounts of the partners were

We calculate the share of each partner as follows:

Partner’s A share in the net income = 360,000 * 200/600 = 120000

Partner’s B share in the net income = 360,000 * 400/600 = 240000

Second: Using the balances of capital at the End of the period:

We calculate the share of each partner as follows:

Partner’s A share in the net income = 360,000 * 400/900 = 160000

Partner’s B share in the net income = 360,000 * 500/900 = 200000

Third : Using the Weighted –Average capital of partners

:



Firstly we have to calculate the Weighted -Average capital of

(The schedule requires the identification of increase and decrease in capital and its related period )



1

- Partner, A

2

- Partner, B

 After calculating the Weighted -Average capital balances of partners ,we use them to allocate the net income like using the beginning and ending balances as follows:

 Partner’s A Weighted -Average Capital 350,000  Partner’s B Weighted -Average Capital 475,000  Total 825,000  So: Partner’s A share in the net income = 360,000 * 350/825 = 152727 Partner’s B share in the net income = 360,000 * 475/825 = 207273

360000

The entry is: Dr Cr Income Summary 360000

Partner-A- Capital 152727

Partner-B- Capital 207273

On 1 Jan 2011, A and B formed a partnership The partnership realized net

income of 150,000 for the year ended 31/12/2011 According to the partnership

agreement the net income is allocated as follows

:

1 )

Calculating interest on capital balances with a rate of 10%and the balances of

the partners were 200000 and 300000 respectively

2 ) The rest of profits and losses is allocated with a ratio of 3:2respectively

.

Required

:

Prepare the journal entry to record the allocation of profit

If the net income distribution include interest on capital

or salaries or bonus , we prepare statement of distribution as follows

2) Allocating the rest (3:2) 60000 40000 ( 100000 )

The partner’s share 80000 70000 0

First: The calculations:

1) Interest on capital

= The partner’s capital balance * % of interest Partner, A = 200000 * 10% = 20000

Partner, B = 300000 * 10% = 30000

2) Allocating the remainder after the interest:

Partner A Partner B Total

3 2 = 5

So, the partner’s A share = 100000 * ( 3/5) = 60000

So, the partner’s B share = 100000 * (2/5 ) = 40000

100000

Second: the entry:

We prepare the entry by the amounts from the statement.

Dr Cr

Income Summary 150000

Partner-A- Capital 80000

Partner-B- Capital 70000

-

Granting the partners interest on the capital and salaries allocating

the rest of net income in a specific ratio

:

 In this case, the partners agree to calculate interest on their capital balances and salaries to partner (s) who manages the company and the rest will be

allocated using specific ratio or capital balances or equally The interest on

capital balances and salaries should be calculated to the partners regardless the company realized net income or loss.

On 1 Jan 2011, A and B formed a partnership The partnership realized net

income of 150,000 for the year ended 31/12/2011 According to the partnership

agreement the net income is allocated as follows

:

1 )

Calculating interest on capital balances with a rate of 10%and the balances of

the partners were 200000 and 300000 respectively

2) Calculating salary to partner B of 1000 monthly.

3 ) The rest of profits and losses is allocated with a ratio of 3:5respectively

.

Required

:

Prepare the journal entry to record the allocation of profit

2) Salary to partner B 12000 (12000)

3) Allocating the rest (3:5) 33000 55000 ( 88000 )

The partner’s share 53000 97000 0

First: The calculations:

1) Interest on capital

= The partner’s capital balance * % of interest Partner, A = 200000 * 10% = 20000

Partner, B = 300000 * 10% = 30000

2) The salary of partner B :

We calculate the annual salary = 1000 monthly * 12 = 12000 3) Allocating the remainder after the interest and salary:

Partner A Partner B Total

3 5 = 8

So, the partner’s A share = 88000 * ( 3/8) = 33000

So, the partner’s B share = 88000 * (5/8 ) = 55000

88000

Second: the entry:

We prepare the entry by the amounts from the statement.

Dr Cr

Income Summary 150000

Partner-A- Capital 53000

Partner-B- Capital 97000

-

Granting the partners interest on the capital, salaries and bonuses

and allocating the rest of net income in a specific ratio

:

 In this case, the partners agree to calculate interest on their capital balances , salaries to partner (s) who manages the company and bonus to partner (s) who renders services to the company and the rest will be allocated using specific ratio or capital balances or equally.

 The interest on capital balances and salaries should be calculated to the partners

regardless the company realized net income or loss but the bonus is calculated when the company realizes net income only

 Example (7)

On 1 Jan 2011, A and B formed a partnership The partnership realized net income of 150,000 for the

year ended 31/12/2011 According to the partnership agreement the net income is allocated as follows

:

1 )

Calculating interest on capital balances with a rate of 10%and the balances of the partners were 200000 and 300000 respectively

2) Calculating salary to partner B of 1000 monthly

3) Calculating bonus to partner A of 20% of the net income after deducting the interest on capital and salaries.

3)The rest of profits and losses is allocated equally.

Solution

We prepare statement of distribution as follows:

Title Partner A Partner B Total

Net income 150000

1 ) Interest on capital 20000 30000 50000 ) )

The remainder 100000

2) Salary of partner B 12000 (12000)

The remainder 88000

3) The bonus of partner A 17600 (17600)

The remainder 70400

3) Allocating the rest equally 35200 35200 ( 70400 )

The partner’s share 72800 77200 0

First: The calculations:

1) Interest on capital

= The partner’s capital balance * % of interest

Partner, A = 200000 * 10% = 20000

Partner, B = 300000 * 10% = 30000

2) The salary of partner B :

We calculate the annual salary = 1000 monthly * 12 = 12000

3) The bonus of partner A:

According to the example:

The bonus = {The net income – (interest + salary)} * % of bonus

The bonus = {The net income – interest } * % of bonus

2- If the agreement is calculating the bonus as a percentage of the net income only:

The bonus = The net income * % of bonus

4) Allocating the remainder after the interest, salary and bonus equally:

So, the share of each partner = 70400 / 2 no of partners = 35200

Second: the entry:

We prepare the entry by the amounts from the statement.

Dr Cr

Income Summary 150000

Partner-A- Capital 77800

Partner-B- Capital 77200