Question

Red and White formed a partnership in Year 1. The partnership agreement provides for annual salary allowances of $55,000 for Red and $45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of $80,000 for Year 2 before any allowance to partners. What amount of these earnings should be credited to each partner's capital account? Red White 1. $40,000 $40,000 2. $43,000 $37,000 3. $44,000 $36,000 4. $45,000 $35,000 $40,000 $40,000 $43,000 $37,000 $44,000 $36,000 $45,000 $35,000

Answer 1

	Total earnings for Year 2	$80,000
	Less: Allowances to partners for the year (55,000+45,000)	$100,000
	Loss for the year 2	($20,000)
	Share of losses:
	Red (20,000*60%)	$12,000
	White (20,000*40%)	$8,000
	Credit to capital accounts	Red	White
	Salary allowance	$55,000	$45,000
	Share of loss	($12,000)	($8,000)
	Net credit to partners accounts	$43,000	$37,000
Ans)	Red - $43,000 White - $37,000