Question

P12.4B (LO 3, 4) AP Terry Lam and Chris Tan have a partnership agreement with the following provisions for sharing profit or loss:

Calculate division of profit or loss. Prepare statement of partners' equity and closing entries.

1. A salary allowance of $20,000 to Lam and $30,000 to Tan

2. An interest allowance of 5% on capital balances at the beginning of the year

3. The remainder to be divided between Lam and Tan on a 3:4 basis

The capital balances on February 1, 2020, for T. Lam and C. Tan were $100,000 and $120,000, respectively. For the year ended January 31, 2021, the partnership reported a loss of $30,000. The partnership also reported the following: T. Lam drawings of $12,000 and C. Tan drawings of $14,400.

Instructions

a. Prepare a schedule to show how the profit or loss is allocated to the two partners.

b. Prepare a statement of partners' equity for the year.

c. Prepare closing entries on January 31, 2021, to allocate the partnership profit and to close the drawings accounts.

Taking It Further  In general, what is the relationship between the salary allowance specified in the profit and loss ratio and a partner's drawings?

Answer 1

Answer

Partners : Terry Lam & Chris Tan

The question states that the year ending result of the firm is Net Loss of $30,000. So, it is assumed that this loss is after meeting interest on capital and salary allowance.

Residuary profit sharing ratio is 3:4. That means, loss of $30,000*3/7 = $12,857 will be deducted from the net income of Terry Lam and the balance loss of $17,143.

Statement of Net Income to Partners

Particulars	Terry Lam	Chriss Tan	Total
Salary allowance	20,000	30,000	50,000
Interest on Capital (5% of beginning Capital Account Balance)	5,000	6,000	11,000
	25,000	36,000	61,000
Less : Loss for the year	(12,857)	(17,143)	(30,000)
Net Income	12,143	18,857	31,000

Interest on capital

To Terry Lam = $100,000 * 5% = $5,000

To Chris Tan = $120,000 * 5% = $6,000

Since the date of withdrawal is not given, interest on opening capital is allowed for the whole year.

Statement of Partners' Equity for the year ended Jan 31, 2021

Particulars	Terry Lam	Chriss Tan	Total
Capital Balance on Feb 1, 2020	100,000	120,000	220,000
Add : Additinal capital Introduced	0	0	0
Add : Net Income	12,143	18,857	31,000
	112,143	138,857	251,000
Less : Withdrawals during the year	(12,000)	(14,400)	(26,400)
Capital Balance on Jan 31, 2021	100,143	124,457	224,600

Closing Entries on Jan 31,2021

Date	General Journal	Debit	Credit
31 Jan 2021	Terry Lam Capital Account	12,000
	Chriss Tan Capital Account	14,400
	Drawings Account		26,400
	(Being Withdrawal adjusted against Capital Accounts of partners)
31 Jan 2021	Terry Lam Capital Account	12,857
	Chriss Tan Capital Account	17,143
	Profit & Loss Account		30,000
	(Being net loss for the year transferred to the capial account of partners in the sharing ratio of 3;4)