Question

The following information relates to the first-year operations of David and Sharon partners.

David and Sharon have been trading successfully in their first year and have recorded a Net Profit of $300,000, for the year ended 31st August 2020. Their Partnership Agreement specifies that each partner is to receive 10% interest on their initial capital investment of $250,000, and salary allowances of $75,000 and $50,000 respectively. The partners’ salaries are to be treated as a base for the respective allocation of profit.

Trial Balance – as at 31st August 2020 as follows

Accounts	Dr $	Cr$
Asset	1 050 000.00
Liability		237 500.00
Profit and Loss Account		300 000.00
Retained Earnings Account – David	14 000.00
Retained Earnings Account – Sharon		30 000.00
Capital Account – David		250 000.00
Capital Account – Sharon		250 000.00
Drawings – David	1 500.00
Drawings – Sharon	2 000.00
Total	1 067 500.00	1 067 500.00

Required:

1. Prepare the Profit and Loss Appropriation Statement for the year ended 31st August 2020. (3m)
2. Balance Sheet as at 31st August 2020. (5m) NOTE: Please use the format of following tables.  
   1. Profit and loss Appropriation Statement

Explanation	$	$	$

b. Balance Sheet

Explanation	$	$

Answer 1

(a)

Profit and loss Appropriation Statement

Explanation	$	$
Net profit		300,000
Less: Partners' salary
David (10% of $250,000)	25,000
Sharon (10% of $250,000)	25,000	(50,000)
		250,000
Less: Salary allowance:
David	75,000
Sharon	50,000	(125,000)
		125,000
*Share of residual Profit:
David	62,500
Sharon	62,500	125,000

(b)

Balance Sheet

Explanation	Amount ($)	Amount ($)
Assets	1,050,000
Total assets		1,050,000
Liabilities	237,500
Capital Account:
David	250,000
Sharon	250,000
Retained Earning:
David	47,000
Sharon	90,500
* Profit and loss ($300,000-$125,000)	175,000
Total Liabilities		1,050,000

* Working note:

(1)

Allocation of profit on the basis of capital ratio i.e as per equal Profit sharing ratio:

Daviid's capital = $250,000

Sharon's capital = $250,000

250000:250000

= 1:1

(2)

When partners leave profits in the business instead of withdrawing , these profits are called retained earning.

Retained Earning Account

Explanation	David	Sharo
Retained earning	$(14,000)	$30,000
Add: Profit	62,500	62,500
Less: Drawing	(1,500)	(2,000)
Retained Earning	$47,000	90,500

(3) Net profit will be reduced by $125,000

$125,000 is distributed among the partners

Thank you :)