Question

Mo Meek, Lu Ling, and Barb Beck formed the MLB Partnership by making capital contributions of $75,600, $294,000, and $470,400, respectively. They predict annual partnership net income of $498,000 and are considering the following alternative plans of sharing income and loss: (a) equally; (b) in the ratio of their initial capital investments; or (c) salary allowances of $83,600 to Mo, $62,700 to Lu, and $94,500 to Barb; interest allowances of 10% on their initial capital investments; and the balance shared as follows: 20% to Mo, 40% to Lu, and 40% to Barb. Prepare the December 31 journal entry to close Income Summary assuming they agree to use plan (c) and that net income is $498,000. Mo, Lu, and Barb withdraw $39,300, $53,300, and $69,300, respectively, at year-end.

Answer 1

Answer:

salary allowances of $83,600 to Mo, $62,700 to Lu, and $94,500 to Barb; interest allowances of 10% on their initial capital investments; and the balance shared as follows: 20% to Mo, 40% to Lu, and 40% to Barb.

net income $498,000, total distributions:

• Mo = $83,600 + (20% x $257,200) = $135,040
• Lu = $62,700 + (40% x $257,200) = $165,580
• Barb = $94,500 + (40% x $257,200) = $197,380

First we need to close Income Summary account to each partner's capital account:

December 31, 202x

Dr income summary 498,000

    Cr Mo Meek, capital 135,040

    Cr Lu Ling, capital 165,580

    Cr Barb Beck, capital 197,380

then we close the drawings accounts to the capital accounts of each partner:

December 31, 202x

Dr Mo Meek, capital 39,300

    Cr Mo Meek, drawings 39,300

Dr Lu Ling, capital 53,300

    Cr Lu Ling, drawings 53,300

Dr Barb Beck, capital 69,300

    Cr Barb Beck, drawings 69,300