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Tim and Tam respectively invested $55 000 and $45 000 to form T & T Partnership...

Tim and Tam respectively invested $55 000 and $45 000 to form T & T Partnership on 1 January 2019. The partnership had a final profit of $66 000 for the year ended 31 December 2019.

Required:

  1. By using Method 2 (fixed capital balances) procedures, prepare the journal entries to close the Profit or Loss Summary account, and then to distribute the profit to partners Tim and Tam under each of the following assumptions:

  1. Tim and Tam agree to share a profit in the ratio of 3:2. (4 marks)

  1. Tim and Tam agree to share a profit in the ratio of their respective original capital investment. (4 marks)
  1. Tim and Tam agree to recognise a respective salary allowance of $20 000 per year to Tim and $15 000 to Tam. In addition, each partner is entitled to 7% interest on his original capital investment, with the remaining profit to be equally shared.     (4 marks)
  1. Repeat the above-mentioned requirement (1) (c), this time assuming T & T Partnership made a profit of only $38 000 for the year ended 31 December 2019.

(4 marks)

Show your relevant workings on the above requirements (1) and (2) to support your journal entries.

Solutions

Expert Solution

Part 1- when profit is 66000

Subpart a& b ??

Subpart c??

Part 2 - when profit is 38000

Subpart a&b ??

Subpart c ??

Note : In subpart c of part 2 we have only $38000 as profit. We have to give 35000 as salary to partners.Balance profit of 3000 is insufficient to give interest on capital at the rate of 7%.

When there is insufficient profit, interest on capital will not be provided, but the profit will be distributed among the partners in their capital ratio.Therefore 3000 is given to partners in the original capital ratio instead of sharing equally.

ekkarill92 answered 1 year ago
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