Carl Dobbs and David Ellis formed Dobbs & Ellis LLP on January 2, 2005. Dobbs invested cash of $50,000, and Ellis invested cash of $20,000 and marketable equity securities (classified as available for sale) with a current fair value of $80,000. A portion of the securities was sold at carrying amount in January 2005 to provide cash for operations of the partnership.
The partnership contract stated that net income and losses were to be divided in the capital ratio and authorized each partner to withdraw $1,000 monthly. Dobbs withdrew $1,000 on the last day of each month during 2005, but Ellis made no withdrawals during 2005 until July 1, when he withdraw all the securities that had not been sold by the partnership. The securities that Ellis withdrew had a current fair value of $41,000 when invested in the partnership on January 2, 2005, and a current fair value of $62,000 on July 1, 2005, when withdrawn. Ellis instructed the accountant for Dobbs & Ellis LLP to record the transaction by reducing Ellis’s capital account balance by $41,000, which was done. Income from operations of Dobbs & Ellis LLP for 2005 amounted to $24,000.
Determine the appropriate division of net income of Dobbs & Ellis LLP for 2005. If the income-sharing provision of the partnership contract is unsatisfactory, state the assumptions you would make for an appropriate interpretation of the partners’ intentions. Describe the journal entry, if any, that you believe should be made for Dobbs & Ellis LLP. (Disregard income taxes.)
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