Problem 12-3A Allocating partnership income P2
Kara Ries, Tammy Bax, and Joe Thomas invested $80,000, $112,000, and $128,000, respectively, in a partnership. During its first calendar year, the firm earned $249,000.
Required
Prepare the entry to close the firm's Income Summary account as of its December 31 year-end and to allocate the $249,000 net income to the partners under each of the following separate assumptions:
1. The partners have no agreement on the method of sharing income and loss.
2. The partners agreed to share income and loss in the ratio of their beginning capital investments.
3. The partners agreed to share income and loss by providing annual salary allowances of $66,000 to Ries, $56,000 to Bax, and $80,000 to Thomas; granting 10% interest on the partners' beginning capital investments; and sharing the remainder equally.
| Journal Entry | Plan 1(see note A) | Plan 2(see note B) | Plan 2(see note C) | |||
| Accounts Title & Explanation | Debit | Credit | Debit | Credit | Debit | Credit |
| Income | $249,000 | &249,000 | &249,000 | |||
| Kara Ries Capital A/c | $83,000 | $62,250 | $79,000 | |||
| Tammy Bax Capital A/c | $83,000 | $87,150 | $72,200 | |||
| Joe Thomas Capital A/c | $83,000 | $99,600 | $97,800 | |||
| (Being Income transferred to partner accounts) | ||||||
| Note A | |
| If there is no agreement on the method of sharing the profits & loss it should be divided equally to all partner | |
| So, Total Income is $249,000 | |
| Kara Ries (249,000/3) | 83,000 |
| Tammy Bax (249,000/3) | 83,000 |
| Joe Thomas (249,000/3) | 83,000 |
| Note B | |
| Income devided to their capital investment ratio | |
| Calculation of ratio of capital investment | |
| Kara Ries (80,000/320,000 *100) | 25% |
| Tammy Bax (112,000/320,000*100) | 35% |
| Joe Thomas (128,000/320,000*100) | 40% |
| Total Capital Invested all the partner | 320,000 |
| (80,000+112,000+128,000) | |
| Calcualtion of partner share in income | |
| Kara Ries (249,000*25%) | 62,250 |
| Tammy Bax (249,000*35%) | 87,150 |
| Joe Thomas (249,000*40%) | 99,600 |
| Total | 249,000 |
| Note C | |
| Total Income | 249,000 |
| Kara Ries Salary | (66,000) |
| Tammy Bax Salary | (56,000) |
| Joe Thomas Salary | (80,000) |
| Income after salary | 47,000 |
| Interest on Kara ries capital(80,000*10%) | (8,000) |
| Interest on Tammy Bax capital(112,000*10%) | (11,200) |
| Interest on Joe Thomas capital(128,000*10%) | (12,800) |
| Income Remaning After salary & Interest on capital | 15,000 |
| This 15,000 has to divided equally | |
| Kara Ries (15000/3) | 5,000 |
| Tammy Bax (15,000/3) | 5,000 |
| Joe Thomas (15,000/3) | 5,000 |
| Total Shares of Partner | |
| Kara ries(66,000+8000+5,000) | 79,000 |
| Tammy Bax(56,000+11,200+5,000) | 72,200 |
| Joe Thomas(80,000+12,800+5,000) | 97,800 |
| Total Income | 249,000 |
Kara Ries, Tammy Bax, and Joe Thomas invested $80,000, $112,000, and $128,000