Question

QS 11-5 Allocation of profit LO3

Lisa Montgomery and Joel Chalmers established a coffee bean distribution business. Their partnership shared profits and losses based on an agreement that gave Lisa a salary allowance of $45,000 and Joel $10,000 with any unallocated profit (loss) shared equally. Prepare the entry to close the Income Summary account at December 31, 2017, assuming a credit balance of $48,000.

Answer 1

Profit & Loss Appropriation account

Accounts title	Amount($)	Amount($)	Accounts title	Amount($)	Amount($)
Partner's salaries			Net profit [Transferred from Income statement ]		48,000
Lisa=48,000X9/11	39,273
Joel=48,000X2/11	8,727
		48,000
Total		48,000	Total		48,000

Ratio of Partner's salary as per partnership agreement of Lisa and Joel = 45,000:10,000 = 9:2

So, available net profit($48,000) can be shared in 9:2 for paying partners salaries. Because total of agreed partners salaries as per partnership deed ( $ 45,000 + $ 10,000 = $ 55,000) is much lower than available net profit before any appropriation ($ 48,000) .