Question

The partnership agreement of Walt, Henry and Victoria provides that profits and losses are to be divided among the partners as follows:

1. Walt is to receive a salary allocation of $10,000 for managing the partnership business.
2. Partners are to receive 10% interest on their average partner capital balances during the year. Note: Drawings are excluded from the computation of average partner capital.
3. Remaining profits/losses are to be divided as follows: Walt, 30%; Henry, 30%; and Victoria, 40%.
4. Walt had a beginning capital account balance on January 1, 2017 of $60,000 and total drawings during the year of $8,000.
5. Henry had a beginning capital account balance on January 1, 2017 of $90,000 and invested an additional $30,000 on September 1, 2017.
6. Victoria had a beginning capital account balance of $110,000 on January 1, 2017 and invested an additional $20,000 on October 1, 2017. Victoria had total drawings during the year of $12,000.
7. In 2018, each partner had total drawings of $5,000.
8. The partnership incurred a net loss of $20,000 during 2017 and had net income of $35,000 during 2018.

Requirements

1. Prepare a schedule showing the allocation of the partnership net loss for each year to each partner. Your schedule should show each component of the net loss or net income amount being allocated to the partner. Hint: refer to your class notes!
2. Prepare a statement of partnership capital for the years ending December 31, 2017 and December 31, 2018.
3. Prepare the necessary journal entries to allocate the net loss to the partners’ capital accounts and to close the partners’ drawing accounts for each year. You may assume that the partnership’s revenues and expenses have already been closed into the “Income Summary” account for each year.

Answer 1

A. Please find attached schedule showing allocation of partnership profit / loss: Please note that "interest on capital" not applicable, if firm incurs loss during the year, because it is payable only from profits of firm and not from loss. Thus, for year 2017, there is net loss and hence no interest on capital allocated to partners.

If for this question sake, interest on capital to be made applicable, even if firm incur loss, then schedule of allocation looks like below:

Schedule showing allocation to partners - year 2017 (Interest on capital not applicable, if firm incurr loss during the year) 31-Dec-17 Net Loss from Income Statement 20,000 31-Dec-17 Loss allocation to partners 31-Dec-17 Remuneration to Partner - Walt 10,000 Walt (30000*30%) 9,000 Henry (30000*30%) 9,000 Victoria (30000*40%) 12,000 30,000 30,000 30,000 35,000 31-Dec-18 Remuneration to Partner - Walt 31-Dec-18 Interest on capital Walt (53000*10%) Henry (111000*10%) Victoria (106000*10%) Schedule showing allocation to partners - year 2018 10,000 31-Dec-18 Net Profit from Income Statement 31-Dec-17 Loss allocation to partners 5,300 Walt (2000*30%) 11,100 Henry (2000*30%) 10,600 Victoria (2000*40%) 27,000 600 600 800 2,000 37,000 37,000

Schedule showing allocation to partners - year 2017 (interest on capital applicable even if firm incur loss) 31-Dec-17 Net Loss from Income Statement 20,000 31-Dec-17 Loss allocation to partners 31-Dec-17 Remuneration to Partner - Walt 10,000 Walt (57500*30%) 31-Dec-17 Interest on Capital Henry (57500*30%) Walt (60000*10%) 6,000 Victoria (57500*40%) Henry ((90000*10%)+(30000*10%/12*4)) 10,000 Victoria ((110000*10%) +20000*10%/12*3)) 11,500 27,500 17,250 17,250 23,000 57,500 57,500 57,500 35,000 31-Dec-18 Remuneration to Partner - Walt 31-Dec-18 Interest on capital Walt (50750*10%) Henry (112750*10%) Victoria (106500*10%) Schedule showing allocation to partners - year 2018 10,000 31-Dec-18 Net Profit from Income Statement 31-Dec-17 Loss allocation to partners 5,075 Walt (2000*30%) 11,275 Henry (2000*30%) 10,650 Victoria (2000*40%) 27,000 600 600 800 2,000 37,000 37,000

B. Attached are the partnership capital account in both scenario for Dec 2017 and Dec 2018. Scenario 1: As a general rule, interest on capital not applicable, if firm incur loss. Scenario 2: But if the rule has to be considered exception for this question, then capital account balances will change and the same also attached herewith for calculations:

Date Description 31-Dec-17 Drawings 31-Dec-17 Net loss allocation Walt 60,000 Capital Account (interest on capital not applicable, if firm incur loss during the year) Debit Walt Henry Victoria Date Description 8,000 12,000 1-Jan-17 Opening Balance 9,000 9,000 12,000 1-Sep-17 Additional Capital Contribution 1-Oct-17 Additional Capital Contribution 31-Dec-17 Remuneration 53,000 111,000 106,000 Credit Henry 90,000 30,000 Victoria 110,000 20,000 10,000 31-Dec-17 To Balance C/d 70,000 120,000 130,000 70,000 120,000 130,000 111,000 106,000 31-Dec-18 Drawings 31-Dec-18 Net loss allocation 5,000 600 5,000 600 5,000 1-Jan-18 Opening Balance 800 31-Dec-18 Remuneration 31-Dec-18 Interest on Capital 110,800 53,000 10,000 5,300 11,100 10,600 31-Dec-18 To Balance C/d 62,700 116,500 68,300 122,100 116,600 68,300 122,100 116,600 Date Description 31-Dec-17 Drawings 31-Dec-17 Net loss allocation Walt 60,000 Capital Account (interest on capital applicable, even if firm incur loss during the year) Debit Walt Henry Victoria Date Description 8,000 12,000 1-Jan-17 Opening Balance 17,250 17,250 23,000 1-Sep-17 Additional Capital Contribution 1-Oct-17 Additional Capital Contribution 31-Dec-17 Remuneration 31-Dec-17 Interest on capital 50,750 112,750 106,500 Credit Henry 90,000 30,000 Victoria 110,000 20,000 10,000 6,000 10,000 11,500 31-Dec-17 To Balance C/d 76,000 130,000 141,500 76,000 130,000 141,500 5,000 112,750 106,500 31-Dec-18 Drawings 31-Dec-18 Net loss allocation 6006 5,000 600 5,000 1-Jan-18 Opening Balance 800 31-Dec-18 Remuneration 31-Dec-18 Interest on Capital 111,350 50,750 10,000 5,075 11,275 10,650 31-Dec-18 To Balance C/d 60,225 118,425 65,825 124,025 117,150 65,825 124,025 117,150

C. Journal entries:

31-Dec-17 Dr 9,000 9,000 12,000 30,000 31-Dec-17 Dr 8,000 12,000 20,000 31-Dec-18 Dr Capital Account-Walt Capital Account-Henry Capital Account-Victoria Net Loss from income statement (To record net loss allocation to partners) Capital Account-Walt Capital Account-Victoria Drawings Account (To record transfer of balance in Drawings account to capital account) Capital Account-Walt Capital Account-Henry Capital Account-Victoria Net Loss from income statement (To record net loss allocation to partners) Capital Account-Walt Capital Account-Henry Capital Account-Victoria Drawings Account (To record transfer of balance in Drawings account to capital account) 600 600 800 Dr 2,000 31-Dec-18 Dr 5,000 5,000 5,000 15,000