Example (8) On 1 Jan 2011, A ,B and C formed a general partnership. The partnership realized net income of 200,000 for the year ended 31/12/2011. According.

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Presentation transcript:

Example (8) On 1 Jan 2011, A ,B and C formed a general partnership. The partnership realized net income of 200,000 for the year ended 31/12/2011. According to the partnership agreement the net income is allocated as follows: 1) Calculating interest on capital balances with a rate of 10%and the balances of the partners were 200000 , 400000 and 300000 respectively. 2) Calculating salary to partner B of 1000 monthly and partner C of 18000 annually . 3) Calculating bonus to partner A of 5% of the net income. 4)The rest of profits and losses is allocated with a ratio of 1:4:2 respectively. Required: Prepare the journal entry to record the allocation of profit.

Solution We prepare the statement of distribution as follows: Title Partner A Partner B Partner C Total Net income 200000 1) Interest on capital 20000 40000 30000 ( (90000 The remainder 110000 2) Salary of partner B&C 12000 18000 (30000) 80000 3) Bonus of partner A 10000 (10000) 70000 3) Allocating the rest (1:4:2) (70000) The partner’s share 92000 68000

First: The calculations: 1) Interest on capital = The partner’s capital balance * % of interest Partner, A = 200000 * 10% = 20000 Partner, B = 400000 * 10% = 40000 Partner, C = 300000 * 10% = 30000 2) The salary of partner B & C : We calculate the annual salary = 1000 monthly * 12 = 12000 But we have the annual salary of partner C = 18000 3) The bonus of partner A: The bonus = {The net income }* % of bonus = 200000 * 5% = 10000 4) Allocating the rest of the net income: A B C Total 1 4 2 = 7 The share of A = 70000 * ( 1/7) = 10000 The share of B = 70000 * ( 4/7) = 40000 The share of C = 70000 * ( 2/7) = 20000

Second: the entry: We prepare the entry by the amounts from the statement. Dr Cr Income Summary 200000 Partner-A- Capital 40000 Partner-B- Capital 92000 Partner-C- Capital 68000

Example (9) On 1 Jan 2011, A ,B and C formed a general partnership. The partnership realized net income of 95,000 for the year ended 31/12/2011. According to the partnership agreement the net income is allocated as follows: 1) Calculating interest on capital balances with a rate of 10%and the balances of the partners were 200000 , 400000 and 300000 respectively. 2) Calculating salary to partner B of 1000 monthly and partner C of 18000 annually . 3) Calculating bonus to partner A of 10000. 4)The rest of profits and losses is allocated with a ratio 1:4:2 respectively. Required: Prepare the journal entry to record the allocation of profit

Solution We prepare the statement of distribution as follows: Title Partner A Partner B Partner C Total Net income 95000 1) Interest on capital 20000 40000 30000 ( (90000 The remainder 5000 2) Salary of partner B&C 12000 18000 (30000) (25000) 3) Bonus of partner A 10000 (10000) (35000) 3) Allocating the rest (1:4:2) (5000) (20000 ) (10000 ) The partner’s share 25000 32000 38000

First: The calculations: 1) Interest on capital = The partner’s capital balance * % of interest Partner, A = 200000 * 10% = 20000 Partner, B = 400000 * 10% = 40000 Partner, C = 300000 * 10% = 30000 2) The salary of partner B & C : We calculate the annual salary = 1000 monthly * 12 = 12000 But we have the annual salary of partner C = 18000 3) The bonus of partner A: The bonus = 10000 ( given) 4) Allocating the rest: A B C Total 1 4 2 = 7 The share of A = (35000) * ( 1/7) = ( 5000) The share of B = ( 35000) * ( 4/7) = (20000) The share of C = (35000) * ( 2/7) = (10000)

Second: the entry: We prepare the entry by the amounts from the statement. Dr Cr Income Summary 95000 Partner-A- Capital 25000 Partner-B- Capital 32000 Partner-C- Capital 38000

Example (10) On 1 Jan 2011, A ,B and C formed a general partnership. The partnership realized net Loss of 55,000 for the year ended 31/12/2011. According to the partnership agreement the net income is allocated as follows: 1) Calculating interest on capital balances with a rate of 10%and the balances of the partners were 200000 , 400000 and 300000 respectively. 2) Calculating salary to partner B of 1000 monthly and partner C of 18000 annually . 3) Calculating bonus to partner A of 5% of the net income. 4)The rest of profits and losses is allocated with a ratio 1:4:2 respectively Required: Prepare the journal entry to record the allocation of net loss.

Solution We prepare the statement of distribution as follows: Title Partner A Partner B Partner C Total Net Loss (55000) 1) Interest on capital 20000 40000 30000 ( (90000 The remainder ( 145000) 2) Salary of partner B&C 12000 18000 (30000) (175000) 3) Allocating the rest (1:4:2) (25000) (100000 ) (50000 ) The partner’s share (5000) (48000) (2000)

First: The calculations: We calculate the interest and salaries regardless the company realized net income or net loss but we calculate the bonus only when it realizes net income. 1) Interest on capital ; = The partner’s capital balance * % of interest Partner, A = 200000 * 10% = 20000 Partner, B = 400000 * 10% = 40000 Partner, C = 300000 * 10% = 30000 2) The salary of partner B & C : We calculate the annual salary = 1000 monthly * 12 = 12000 But we have the annual salary of partner C = 18000 3) The bonus of partner A: No bonus to the partner A 4) Allocating the rest : A B C Total 1 4 2 = 7 The share of A = (175000) * ( 1/7) = ( 25000) The share of B = ( 175000) * ( 4/7) = (100000) The share of C = (175000) * ( 2/7) = (50000)

Second: the entry: We prepare the entry by the amounts from the statement. Dr Cr Partner-A- Capital 5000 Partner-B- Capital 48000 Partner-C- Capital 2000 Income Summary 55000

The drawings of the partners : The partners may agree that each of them can withdraw an amount in cash. Here we prepare the following entries: 1) Recording the drawings: At every time when the partner withdraws , the entry is: Partner (--) Drawings xx Cash xx 2) Closing the drawings: At the end of the year by the total of drawings we prepare the following entry: Partner (--) Capital xx Partner (--) Drawings xx

Partner’s Loan to the company: If the partner lends a loan to a company, we prepare the following entries : 1) Recording the loan : Cash xx Partner (--) Loan xx 2) When the company returns the money to the partner :

Example The drawings of partner A during the year were the following: 1- On April, 15 of 6000 cash. 2- On July, 1 of 4000 cash . Required : Prepare the journal entries. Solution 1) Recording the drawings April, 15 : Partner (A) Drawings 6000 Cash 6000 2) Recording the drawings July, 1 : Partner (A) Drawings 4000 Cash 4000 2) Closing the total of drawings Dec., 31: Partner (A) Capital 10000 Partner (A) Drawings 10000 (The total of drawings= 6000 + 4000 = 10000 )