Question

Smith and Olson have a partnership agreement which includes the following provisions regarding sharing net income or net loss:

1. A salary allowance of $30,000 to Smith and $15,000 to Olson.
2. An interest allowance of 10% on capital balances at the beginning of the year.
3. The remainder to be divided 60% to Smith and 40% to Olson.

The capital balances on January 1, 2021, for Smith and Olson were $80,000 and $100,000, respectively. During 2021, the Smith and Olson Merchandising Partnership had sales of $330,000, cost of goods sold of $190,000, and operating expenses of $60,000.

Required:

1. Prepare an income statement for the Brewer and Tony Merchandising Partnership for the year ended December 31, 2021.

2. Prepare a schedule showing Division of Net Income to each of the partners for the year ended December 31, 2021.

3. Provide the closing entry to record the allocation of net income.

Answer 1

A)

Income statement for the partnership firm for the year ended December 31st 2021

Sales	$ 330,000
Less: Cost of goods sold	$ 190,000
Gross profit	$ 140,000
Less: Operating expenses	$ 60,000
Operating profit	$ 80,000

B)

Schedule of division of net income for the year ended December 31st, 2021

Particulars	Smith ($)	Olson ($)	Total ($)
Partner's salaries	30,000	15,000	45,000
Interest on capital	8,000	10,000	18,000
Remaining profit [ $ 80,000 - ( $ 45,000 + $ 18,000)] distribution in 60:40	10,200	6,800	17,000
Total =	48,200	31,800	80,000

C)

Closing Entry

Account titles and explanation	Debit	Credit
Income summary	80,000
Partner - Smith		48,200
Partner - Olson		31,800
( Allocation of net income recorded)