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.

Answer 1

Schedule of distribution of profit or loss
Particulars	Total	Capital
Terry Lam	Chris Tan
Salary Allowance	50,000	20,000	30,000
Interest on Capital	15,000	5,000	10,000
Loss reported for the year	30,000	-	-
Net Loss to be distributed in the ratio 3:4	95,000	40,714	54,286
(50,000 + 15,000 + 30,000)		(95,000 x 3/7)	(95,000 x 4/7)

Statement of partners' equity
Particulars	Capital	Appropriation	Total Equity
Terry Lam	Chris Tan
Balance as on Feb 1, 2020	100,000	200,000	-	300,000
Loss reported for the year	-	-	(30,000)	(30,000)
Salary Allowance	20,000	30,000	(50,000)	-
Interest on Capital	5,000	10,000	(15,000)	-
Drawings	(12,000)	(14,400)	-	(26,400)
Partners share of remaining profit	(40,714)	(54,286)	95,000	-
Balance as on Jan 31, 2021	72,286	171,314	-	243,600

Closing Entries
Journal
Date	Particulars	LF	Debit	Credit
31-Jan	Lam's Capital Account	Dr		40,714
	Tan's Capital Account	Dr		54,286
		To Profit and Loss Appropriation Account			95,000
	(Being share of loss distributed among the partners)
31-Jan	Lam's Capital Account	Dr		12,000
	Tan's Capital Account	Dr		14,400
		To Drawings Account				26,400
	(Being drawings account transferred to capital accounts)