Question

Tim and Tam respectively invested $55 000 and $45 000 to form T & T Partnership on 1 January 2019. The partnership had a final profit of $66 000 for the year ended 31 December 2019.

Required:

(1) By using Method 2 (fixed capital balances) procedures, prepare the journal entries to close the Profit or Loss Summary account, and then to distribute the profit to partners Tim and Tam under each of the following assumptions:

(a) Tim and Tam agree to share a profit in the ratio of 3:2.

(b) Tim and Tam agree to share a profit in the ratio of their respective original capital investment.

(c) Tim and Tam agree to recognise a respective salary allowance of $20 000 per year to Tim and $15 000 to Tam. In addition, each partner is entitled to 7% interest on his original capital investment, with the remaining profit to be equally shared.    

(2) Repeat the above-mentioned requirement (1) (c), this time assuming T & T Partnership made a profit of only $38 000 for the year ended 31 December 2019.


Show your relevant workings on the above requirements (1) and (2) to support your journal entries.

Thanks!

Answer 1

1 a.                                          Journal Entry

Date	Account Head	Debit	Credit
2019 Dec 31	Profit & Loss Summary A/c.....Dr	$66,000
	Tim Current A/c		$39,600
	Tam Current A/c		$26,400
	Profit Transferres to Partners Current Account in the ratio of 3:2.

1b.                      Journal Entry

Date	Account Head	Debit	Credit
2019 Dec 31	Profit & Loss A/c.....Dr	$66,000
	Tim Current A/c		$36,300
	Tam Current A/c		$29,700
	Profit Transferres to Partners Current Account in the ratio of their original investment which is 11:9

Calculation Of profit Sharing ratio According to their Original Investment

Original Capital Investment of Tim   = $55000

Original Capital Investment of Tam   = $ 45000

Ratio = 55000 : 45000 = 11:9.

1 c             Journal Entry

Date	Account Head	Debit	Credit
2019 Dec 31	Interst on Capital A/c.....Dr	$24000
	Tim Current A/c		$3,850
	Tam Current A/c		$3,150
	Intesrst On Capital Provided to Partners.
Dec31	Salary Allowances A/c.....Dr	$35000
	Tim Current Account		$20000
	Tam current Account		$15000
Dec31	Profit & Loss Statement A/c...Dr	$24,000
	Tim Current A/c		$12,000
	Tam Current A/c		$12,000

   Calculation of Profit to be credited to Partners.

                          Profit & Loss Appropriation Account

Account Head	Amount Dr	Account Head	Amount Cr
Salary Allowances	35,000	Profit & Loss Account	$66,000
Tim - 20,000
Tam - 15000
Interest On Capital	7,000
Tim   - 3,850
Tam   -3,150
Profit Transferred to Partners Current Account	24,000
Tim- 12,000
Tam-12,000
Total	66,000		66,000

2.a                   Journal Entries

Date	Account Head	Debit	Credit
2019 Dec 31	Profit & Loss Summary A/c.....Dr	$38,000
	Tim Current A/c		$22,800
	Tam Current A/c		$15,200
	Profit Transferres to Partners Current Account in the ratio of 3:2.

2b Journal Entries

Date	Account Head	Debit	Credit
2019 Dec 31	Profit & Loss A/c.....Dr	$38,000
	Tim Current A/c		$20,900
	Tam Current A/c		$17,100
	Profit Transferres to Partners Current Account in the ratio of their original investment which is 11:9

2c                                 Journal Entries

Date	Account Head	Debit	Credit
2019 Dec 31	Interst on Capital A/c.....Dr	$24000
	Tim Current A/c		$3,850
	Tam Current A/c		$3,150
	Intesrst On Capital Provided to Partners.
Dec31	Salary Allowances A/c.....Dr	$35000
	Tim Current Account		$20000
	Tam current Account		$15000
Dec31	Tim Current A/c....Dr	$2,000
	Tam Current A/c....Dr	$2,000
	Profit & Loss Statement A/c		$4,000
	Loss transferres to Partners current A/c.

.

      Profit & Loss Appropriation Account

Account Head	Amount Dr	Account Head	Amount Cr
Salary Allowances	35,000	Profit & Loss Account	$38,000
Tim - 20,000
Tam - 15000		Loss Transferred to Partners Current A/c.	$4000
		Tim    2000
Interest On Capital	7,000	Tam   2000
Tim   - 3,850
Tam   -3,150
Total	42,000		42,000