week 9
knohe_
13.2.docxProblem 13-2 (LO 3, 4) Allocation of profits and determination of withdrawals.
Sandburg and Williams are the owners of a partnership that manufactures commercial lighting fixtures. Profits are allocated among the partners as follows:
Sandburg
Williams
Salaries
$100,000
$125,000
Bonus as a percentage of net income after the bonus
10%
0%
Interest on weighted-average capital including withdrawals and excluding current-year profits
5%
5%
Sandburg was divorced as of the beginning of 2015 and as part of the divorce stipulation agreed to the following:
1. The spouse is to receive annual distributions traceable to years 2015 and 2016. The annual distribution is to be the greater of $100,000 or 25% of base earnings.
2. Base earnings are defined as net income of the partnership less: (a) salaries traceable to Sandburg and Williams of $75,000 and $125,000, respectively, and (b) bonus to Sandburg as stated subject to the limitation that it not to exceed $50,000.
3. Sandburg’s spouse would receive a distribution from the partnership on August 31 of each current year and on February 28 of each subsequent year. The August 31 target distribution is $50,000. If the August distribution is less than $50,000, Sandburg’s spouse will receive one-half year’s interest on the deficiency at the rate of 10% per year. The following distribution on February 28 must be of an amount such that the two distributions equal the required distribution traceable to the calendar year just ended plus any interest associated with the August distribution.
4. All distributions to Sandburg’s spouse are to be considered as a withdrawal of capital by Sandburg.
5. Aside from distributions to Sandburg’s spouse, Sandburg’s annual withdrawals cannot exceed $125,000.
6. Upon sale or dissolution of the partnership prior to February 28, 2016, Sandburg’s spouse would receive 50% of the net realizable value of Sandburg’s partnership capital.
7. On February 28, 2017, Sandburg’s spouse will receive an additional final distribution equal to 50% of the sum of Sandburg’s capital balance as of December 31, 2016, less the amount of the February 2017 distribution as called for by item (3) above.
Capital balances at the beginning of 2015 were $180,000 and $125,000, respectively, for Sandburg and Williams. Activity related to the partnership during 2015 and 2016 is as follows:
2015
2016
Partnership net income
$750,000
$700,000
Distribution to Sandburg’s spouse:
February 28
0
to be determined
August 31
40,000
50,000
Distributions to Sandburg:
June 30
60,000
125,000
September 30
65,000
0
Distributions to Williams:
June 30
30,000
300,000
September 30
90,000
20,000
Required
