Question

The partnership agreement of Walt, Henry and Victoria provides that profits and losses are to be divided among the partners as follows:

1. Walt is to receive a salary allocation of $10,000 for managing the partnership business.
2. Partners are to receive 10% interest on their average partner capital balances during the year. Note: Drawings are excluded from the computation of average partner capital.
3. Remaining profits/losses are to be divided as follows: Walt, 30%; Henry, 30%; and Victoria, 40%.
4. Walt had a beginning capital account balance on January 1, 2017 of $60,000 and total drawings during the year of $8,000.
5. Henry had a beginning capital account balance on January 1, 2017 of $90,000 and invested an additional $30,000 on September 1, 2017.
6. Victoria had a beginning capital account balance of $110,000 on January 1, 2017 and invested an additional $20,000 on October 1, 2017. Victoria had total drawings during the year of $12,000.
7. In 2018, each partner had total drawings of $5,000.
8. The partnership incurred a net loss of $20,000 during 2017 and had net income of $35,000 during 2018.

1. Prepare a schedule showing the allocation of the partnership net loss for each year to each partner. Your schedule should show each component of the net loss or net income amount being allocated to the partner. Hint: refer to your class notes!
2. Prepare a statement of partnership capital for the years ending December 31, 2017 and December 31, 2018.
3. Prepare the necessary journal entries to allocate the net loss to the partners’ capital accounts and to close the partners’ drawing accounts for each year. You may assume that the partnership’s revenues and expenses have already been closed into the “Income Summary” account for each year

Answer 1

Solution:
A. Allocation of profit/ Loss
Year 2017 Net Loss	20000
Allocation
	Walt	Henry	Victoria
Profit Sharing Ratio	30%	30%	40%
	6000	6000	8000
Year 2018 Net Profit	35000
Allocation
	Walt	Henry	Victoria
Profit Sharing Ratio	30%	30%	40%
	10500	10500	14000
Note: It is being assumed that net profit/loss given is after deducting salary expense and interest on capital
B. Statement of partnership capital
	Walt	Henry	Victoria
Opening Balance for year 2017	60000	90000	110000
Add: Capital Invested	0	30000	20000
Add: Interest on capital	6000	10500	12000
Less: Loss for the year	-6000	-6000	-8000
Less: Drawings	-8000	0	-12000
Closing Balance for year 2017	52000	124500	122000
	Walt	Henry	Victoria
Opening Balance for year 2018	52000	124500	122000
Add: Capital Invested	0	0	0
Add: Interest on capital	5200	12450	12200
Add: Profit for the year	10500	10500	14000
Less: Drawings	-5000	-5000	-5000
Closing Balance for year 2018	62700	142450	143200
Assumed salary was paid and not added to capital
Interest on Capital Working
	Walt	Henry	Victoria
Opening Capital 2017	60000	90000	110000
Invested in 2017		30000	20000
Closing Capital 2017	60000	120000	130000
Average Capital	60000	105000	120000	(Simple Average taken, weighted average can also be taken if needed)
				(also ignored drawings and profit distribution for the purpose of interest)
Interest Rate	10%	10%	10%
Total Interest given	6000	10500	12000
Interest on Capital Working
	Walt	Henry	Victoria
Opening Capital 2018	52000	124500	122000
Invested in 2018	0	0	0
Closing Capital 2018	52000	124500	122000
Average Capital	52000	124500	122000	(Simple Average taken, weighted average can also be taken if needed)
				(also ignored drawings and profit distribution for the purpose of interest)
Interest Rate	10%	10%	10%
Total Interest given	5200	12450	12200
C. Journal Entries
For allocating net loss to capital for 2017
	Debit	Credit
Capital Account-Walt	6000
Capital Account-Henry	6000
Capital Account-Victoria	8000
Profit and Loss A/c		24000
For allocating net profit to capital for 2018
	Debit	Credit
Capital Account-Walt		10500
Capital Account-Henry		10500
Capital Account-Victoria		14000
Profit and Loss A/c	35000
For allocating drawings for 2017
	Debit	Credit
Capital Account-Walt	8000
Capital Account-Henry	0
Capital Account-Victoria	12000
Cash/Bank		20000
For allocating drawings for 2018
	Debit	Credit
Capital Account-Walt	5000
Capital Account-Henry	5000
Capital Account-Victoria	5000
Cash/Bank		15000