Question

At the end of its first year of operations on December 31, 2012, SHB Company's accounts show the following.

Partner Drawings Capital

Staal $15,000 $40,000

Harris 10,000 25,000

Blaine 5,000 15,000

The capital balance represents each partner's initial capital investment. Therefore, net income or net loss for 2012 has not been closed to the partners' capital accounts.

Instructions

(a) Journalize the entry to record the division of net income for 2012 under each of the independent assumptions shown.

1. Net income is $50,000. Income is shared 5 : 3: 2.

2. Net income is $40,000. Staal and Harris are given salary allowances of $15,000 and $10,000, respectively. The remainder is shared equally.

3. Net income is $37,000. Each partner is allowed an interest of 10% on beginning capital balances. Staal is given a $20,000 salary allowance. The remainder is shared equally.

(b) Prepare a schedule showing the division of net income under the assumption (3) above.

(c) Prepare a partners' capital statement for the year under the assumption (3) above.

Answer 1

(a) Journal entries to record the division of net income for 2012 under each of the independent assumptions shown below:

1) Net income is $50,000. Income is shared 5 : 3: 2. and Journal entries to record the division of net income for 2012 is as follows:

Account and explanation	Debit ($)	Credit($)
Net Income	50,000
Staal Capital ($50,000 * 5/10)		25,000
Harris Capital ($50,000 * 3/10)		15,000
Blaine Capital ($50,000 * 2/10)		10,000
(Net Income is recorded)

2) Net income is $40,000. Staal and Harris are given salary allowances of $15,000 and $10,000, respectively. The remainder is shared equally.

				$
Salary allowances:			Net Income	40,000
Staal Capital		15,000
Harris Capital		10,000
Blaine Capital		0
Remaining Net Income
(Distributed Equally)
Staal Capital(1/3)	5,000
Harris Capita (1/3)	5,000
Blaine Capital (1/3)	5,000	15,000
Total		40,000	Total	40,000

Journal entries to record the division of net income for 2012 is as follows:

Account and explanation	Debit ($)	Credit($)
Net Income	15,000
Staal Capital		5,000
Harris Capital		5,000
Blaine Capital		5,000
(Recorded the division of net income)

3)Net income is $37,000. Each partner is allowed an interest of 10% on beginning capital balances. Staal is given a $20,000 salary allowance. The remainder is shared equally.

(b) a schedule showing the division of net income under the assumption (3) above is prepared below:

				$
Interest allowed on beginning capital balances			Net Income	37,000
Staal Capital($40,000*10%)		4,000
Harris Capital ($25,000 *10%)		2,500
Blaine Capital (15,000*10%)		1,500
Salary allowances:
Staal Capital		20,000
Harris Capital		0
Blaine Capital		0
Remaining Net Income
(Distributed Equally)
Staal Capital(1/3)	3,000
Harris Capita (1/3)	3,000
Blaine Capital (1/3)	3,000	9,000
Total		37,000	Total	37,000

Journal entries to record the division of net income for 2012 is as follows:

Account and explanation	Debit ($)	Credit($)
Net Income	9,000
Staal Capital		3,000
Harris Capital		3,000
Blaine Capital		3,000
(Recorded the Distribution of net income equally)

(c) a partners' capital statement for the year under the assumption (3) above is as follows:

	Staal Capital	Harris Capital	Blaine Capital		Staal Capital	Harris Capital	Blaine Capital
Drawing	15,000	10,000	5,000	Capital Balance	40,000	25,000	15,000
				Salary allowance	20,000	-	-
Balance	52,000	20,500	14,500	Interest allowed	4,000	2,500	1,500
(Ending)				Net Income	3,000	3,000	3,000
Total	67,000	30,500	19,500	Total	67,000	30,500	19,500