Question

Problem 19.4A Computing and recording the division of net income or loss between partners; preparing a statement of partners' equities. LO 19-4, 19-5

Lewis Wardell and Lewis Lomas own Lewis’ Antiques. Their partnership agreement provides for annual salary allowances of $79,000 for Wardell and $69,000 for Lomas, and interest of 10 percent on each partner’s invested capital at the beginning of the year. The remainder of the net income or loss is to be distributed 60 percent to Wardell and 40 percent to Lomas. The partners withdraw their salary allowances monthly. On January 1, 2019, the capital account balances were Wardell, $290,000, and Lomas, $250,000. On December 15, 2019, Lomas made a permanent withdrawal of $89,000. The net income for 2019 was $210,000.

1. Prepare the general journal entry on December 15, 2019, to record the permanent withdrawal by Lomas.

2. Prepare the general journal entries on December 31, 2019, to:

a. Record the salary allowances for the year.

b. Record the interest allowances for the year.

c. Record the division of the balance of net income.

d. Close the drawing accounts into the capital accounts, assuming that Wardell and Lomas have withdrawn their full salary allowances.

3. Prepare a schedule showing the division of net income to the partners as it would appear on the income statement for 2019.

4. Prepare a statement of partners’ equities showing the changes that took place in the partners’ capital accounts during 2019.

Analyze:  
By what percentage did Wardell’s capital account increase in the fiscal year 2019?

Answer 1

1.

Date	Account Titles	Debit	Credit
Dec-15	Lewis Lomas, Capital	$          89,000
	Cash		$           89,000

2.

Date	Account Titles	Debit	Credit
Dec-31	Income Summary	$        148,000
	Lewis Wardell, Capital		$           79,000
	Lewis Lomas, Capital		$           69,000
Dec-31	Income Summary	$          54,000
	Lewis Wardell, Capital		$           29,000
	Lewis Lomas, Capital		$           25,000
Dec-31	Income Summary	$             8,000
	Lewis Wardell, Capital		$             4,800
	Lewis Lomas, Capital		$             3,200
Dec-31	Lewis Wardell, Capital	$          79,000
	Lewis Wardell, Drawing		$           79,000
Dec-31	Lewis Lomas, Capital	$          69,000
	Lewis Lomas, Drawing		$           69,000

3.

	Lewis Wardell	Lewis Lomas	Total
Net Income			$          210,000
Salary Allowance	$          79,000	$           69,000	$          148,000
Interest Allowance	$          29,000	$           25,000	$            54,000
Total Salaries and Interest	$        108,000	$           94,000	$          202,000
Balance of Income			$              8,000
Balance of Income allocated	$             4,800	$             3,200	$              8,000
Income of each partner	$        112,800	$           97,200	$          210,000

4.

Statement of Partners Equity
	Lewis Wardell	Lewis Lomas	Total
Capital Balances, Jan 1	$        290,000	$         250,000	$          540,000
Net Income	$        112,800	$           97,200	$          210,000
	$        402,800	$         347,200	$          750,000
Less Permanent Withdrawls		$           89,000	$            89,000
Less Normal Withdrawls	$          79,000	$           69,000	$          148,000
Capital Balances, Dec 31	$        323,800	$         189,200	$          513,000

5.
Increase in Capital Account of Wardell = ($323800-290000) / 290000 = 11.66%

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