Question

1 A and B form the AB partnership. According to the agreement, A contributed $70,000 in cash while B contributed $80,000. Make the journal entry to form the partnership under the following assumptions:

a) The agreement was silent about allocating capital balances.

b) The agreement specified that capital balances will be allocated equally and the bonus method will be used.

c) The agreement specified that capital balances will be allocated equally and the goodwill method will be used.

2 Using the information from question #la above, the partners in the AB partnership agreed that profits and losses will be shared as follows • Salary: A $65,000 B $35,000 • Interest: Partners get 10% interest on beginning capital balance • Bonus: Partner A gets a bonus of 15% of net income generated • Remaining profit or loss shared equally Assume that after the first year of operation, the AB partnership generated: i) Net income $150,000 ii) Net income $70,000 iii) Net loss ($75,000)

a) For each of the income/ loss amounts above, determine the partners share of the income or loss

b) Prepare the end of year closing entries

c) Determine the ending capital balances for each partner

Answer 1

In the absence of Partneship agreement, no interest on capital, salary, commission is to be allowed to partners.

(i) If Net income $150,000

Journal Entry

Particulars	Dr ($)	Cr ($)
Cash A/c	150,000
To A's Capital A/c		70,000
To B's Capital A/c		80,000
(Being Cash introduced into the business by A & B partners)
Profit & Loss Appropriation A/c	115,000
To A's Salary		65,000
To B's Salary		35,000
To Interest on Capital		15,000
A (70,000*10%) = 7,000
B(80,000*10%) = 8,000
(Being adjustment done in P&L a/c)

Profit & Loss Appropriation Account

Dr Cr

Particulars	$	Particulars	$
To Salary A/c	100,000	By Profit & Loss A/c	150,000
A - 65,000
B - 35,000
To Interest on Capital A/c	15,000
A - 7,000
B - 8,000

Partners' Capital Account

Dr Cr

Particulars	A	B	Particulars	A	B
To Balance c/d	70,000	80,000	By Balance b/d	70,000	80,000
			By Salary A/c	65,000	35,000
			By Interest on Capital A/c	7,000	8,000
			By Profit & Loss Appropriation A/c

Partners' Current Account

Dr Cr

Particulars	A	B	Particulars	A	B