Question

Liam and Katano formed a partnership to open a sushi restaurant by investing $110,000 and $120,000, respectively. They agreed to share profit based on an allocation to Liam of an annual salary allowance of $165,000, interest allowance to both Liam and Katano equal to 12% of their beginning-of-year capital balance, and any balance based on a 1:3 ratio, respectively. At the end of their first year, December 31, 2020, the Income Summary had a credit balance of $45,000. Liam withdrew $22,000 during the year and Katano $39,000.

Required:
1. Determine each partner’s share if the first-year profit was $45,000. Prepare the entry to close the Income Summary on December 31, 2020. (Leave no cell blank. Enter "0" when the answer is zero. Negative answers should be indicated by a minus sign.)

2. Calculate the balance in each partner’s capital account at the end of their first year. (Negative answers (i.e. debit account balances) should be indicated by a minus sign.)

Answer 1

1.

	Liam	Katano	Total
Salary allowance	165,000	0	165,000
Interest allowance	13,200	14,400	27,600
Total	178,200	14,400	192,600
Net loss to be divided	- 36,900	- 110,700	- 147,600
Net INCOME allocation	$141,300	- 96,300	$45,000

Interest on capital of Liam = 110,000 x 12%

= $13,200

Interest on capital of Katano = 120,000 x 12%

= $14,400

Net income = $45,000

Total of salary and interest allowance = $192,600

Net loss to be divided = Net income - Total of salary and interest allowance

= 45,000 - 192,600

= - 147,600

Liam's share of loss = 147,600 x 1/4

= $36,900

Katano's share of loss = 147,600 x 3/4

= $110,700

Journal

December 31, 2020	Account	Debit	Credit
	Income summary	45,000
	Katano's Capital	96,300
	Liam's capital		141,300

2.

Capital accounts

	Liam	Katano
Beg. balance	110,000	120,000
Salary allowance	165,000	0
Interest allowance	13,200	14,400
Net loss	- 36,900	- 110,700
Withdrawals	- 22,000	- 39,000
Ending balance	$229,300	- $15,300