Question

Ben Conway, Ida Chan, and Clair Scott formed CCS Consulting this year by making capital contributions of $248,000, $284,000, and $178,000, respectively. They anticipate annual profit of $426,000 and are considering the following alternative plans of sharing profits and losses:

1. Equally;
2. In the ratio of their initial investments; or
3. Salary allowances of $110,000 to Conway, $87,000 to Chan, and $62,000 to Scott and interest allowances of 10% on initial investments, with any remaining balance shared equally.

Required :
1. Use the schedule to show how a profit of $426,000 would be distributed under each of the alternative plans being considered. (Enter all amounts as positive values.)

2. Prepare a statement of changes in equity showing the allocation of profit to the partners, assuming they agree to use alternative (c) and the profit actually earned for the year ended December 31, 2020, is $426,000. During the year, Conway, Chan, and Scott withdraw $42,000, $32,000, and $22,000, respectively. (Enter all amounts as positive values.)

3. Prepare the December 31, 2020, journal entry to close Income Summary assuming they agree to use alternative (c) and the profit is $426,000. Also, close the withdrawals accounts.

Answer 1

Answer:

Required:

1) Preperation of the schedule to show how a profit of $426,000 would be distributed under each of the alternative plans being considered:

Criteria mentioned in Question	Particulars	Conway Share	Chan Share	Scott Share	Total
A) Profits shared Equally	Profit	$ 142,000	$ 142,000	$ 142,000	$ 426,000
B) In the ratio of their initial investments	Profit (Working notes below)	$ 148,800	$ 170,400	$ 106,800	$ 426,000
C) As per adjustments Given in question	Profit				$ 426,000
	--Salary Allowances	$ 110,000	$ 87,000	$ 62,000	$ 259,000
	--InterestAllowances (10% of initial investments)	$ 24,800	$ 28,400	$ 17,800	$ 71,000
	Total Salaries & Interest Allowances	-	-	-	$ 330,000
	Remaining Profit ($426,000 - $330,000)	-	-	-	$ 96,000
	Profit Shared Equally (Given in question)	$ 32,000	$ 32,000	$ 32,000	$ 96,000
	Partners Shares	$ 166,800	$ 147,400	$ 111,800	-

Working Notes:

Initial Investments: Sharing as per initial investments for requirement B:

Conway :$248,000 Chan: $284,000 Scott: $178,000

= Total = $248,000 + $284,000 + $178,000 = $ 710,000

: Conway = Profit ($426,000) x $248,000 / $710,000 = $148,800

: Chan = Profit ($426,000) x $284,000 / $710,000 = $170,400

: Scott = Profit ($426,000) x $178,000 / $710,000 = $106,800

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2) Preperation  of statement of changes in equity showing the allocation of profit to the partners, assuming they agree to use alternative (c) and the profit actually earned for the year ended December 31, 2020, is $426,000. During the year, Conway, Chan, and Scott withdraw $42,000, $32,000, and $22,000, respectively:

Statement of changes in Equity (Capital) by year end:

Particulars	Conway	Chan	Scott	Total
Opening capital (January 1st)--- {1}	$ 248,000	$ 284,000	$ 178,000	$ 710,000
Add : Profit shares (Calculated above)---{2}	$ 166,800	$ 147,400	$ 111,800	$ 426,000
Less: Withdrawls---{3}	$ 42,000	$ 32,000	$ 22,000	$ 96,000
Closing Capital (December 31st)---{1 + 2 - 3}	$ 372,800	$ 399,400	$ 267,800	$ 1,040,000

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3) Prepare the December 31, 2020, journal entry to close Income Summary assuming they agree to use alternative (c) and the profit is $426,000. Also, close the withdrawals accounts.

Journal Entries as on December 31, 2020:

For profit sharing:

Date	Particulars	$ Debit	$ Credit
31/12/2020	Income Summary A/c Dr	$ 426,000	-
	To Conway Capital Account Cr	-	$ 166,800
	To Chan Capital Account Cr	-	$ 147,400
	To Scott Capital Account Cr	-	$ 111,800
	{Being share in profits deistributed among partners}

For Drawings:

Date	Particulars	$ Debit	$ Credit
31/12/2020	Conway Capital Account A/c Dr	$ 42,000	-
	To Conway Drawings	-	$ 42,000
	{Being amount withdrawn by conway as drawings}
-	-	-	-
31/12/2020	Chan Capital Account A/c Dr	$ 32,000	-
	To Chan Drawings	-	$ 32,000
	{Being amount withdrawn by Chan as drawings}
-	-	-	-
31/12/2020	Scott Capital Account A/c Dr	$ 22,000	-
	To Scott Drawings	-	$ 22,000
	{Being amount withdrawn by Scott as drawings}

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