Question

Liam and Katano formed a partnership to open a sushi restaurant by investing $103,000 and $113,000, respectively. They agreed to share profit based on an allocation to Liam of an annual salary allowance of $158,000, 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 $38,000. Liam withdrew $15,000 during the year and Katano $32,000.

Required:
1. Determine each partner’s share if the first-year profit was $38,000. 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	158,000	0	158,000
Interest allowance	12,360	13,560	25,920
Total	170,360	13,560	183,920
Net loss to be divided	- 36,480	- 109,440	- 145,920
Net INCOME allocation	$133,880	- $95,880	$38,000

Interest on capital of Liam = 103,000 x 12%

= $12,360

Interest on capital of Katano = 113,000 x 12%

= $13,560

Net income = $38,000

Total of salary and interest allowance = 183,920

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

= 38,000 - 183,920

= - 145,920

Liam's share of loss = 145,920 x 1/4

= $36,480

Katano's share of loss = 145,920 x 3/4

= $109,440

Journal

Account	Debit	Credit
Income summary	38,000
Katano's Capital	95,880
Liam's capital		133,880

2.

Capital accounts

	Liam	Katano
Beg. balance	103,000	113,000
Salary allowance	158,000	0
Interest allowance	12,360	13,560
Net loss	- 36,480	- 109,440
Withdrawals	- 15,000	- 32,000
Ending balance	$221,880	- $14,880