Salaries interest and remainder in a fixed ratio

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Salaries, Interest and Remainder in a Fixed Ratio Under Income Ratio 5, salaries and interest must be allocated before the remainder is divided as a fixed ratio. This is true even if the salary and interest provisions exceed net income and partnership suffers a net loss. To illustrate: Capital Balances on Jan.1 were King $28000 and Lee $24000. For the year ended December 31, 2003, partnership net income was $22000. The partnership agreement provides for: (1) salary allowances of $8400 to King and $6000 to Lee. (2) Interest Allowances of 10% on Capital balances at the beginning of the year (3) Remainder is to be distributed equally.
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The entry to record the division of net income follows: Now let’s assume the following: Agreement and Capital Balances are the same but the business reports a net loss of $18,000 In this case, the salary and interest allowances creates a deficiency of $37,600 ($18,000 + salary + interest allowance). The deficiency is divided equally among the partners as shown below: Any remaining deficiency or excess is always allocated to partners. Take note of diff words!*
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Partnership Financial Statements The only difference between financial statements of proprietorships and partnerships is owners involved.The allocation of the partnership net income or loss is often disclosed as a separate schedule or note to the statement. The statement of equity for a partnership is called the statement of partners’ capital . It shows: - Explains changes in each partner’s capital account - In total partnership capital during the year Changes in capital result in capital investments, drawings and each partner’s share of net income/loss. From the previous example with a net income of $22,000 the Statement of Partners’ Capital is shown below. Statement of partners’ capital is prepared from income statement and the partners’ capital and drawings account.The next statement to be created is called a Balance Sheet but it can be a partial balance sheet meaning only one section is shown. The partners’ equity section in Kingslee Company’s balance sheet shows the following:
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However, large partnerships such as international accounting firms don’t report each individual partner’s equity separately because it’s impractical. Those amounts are usually aggregated in the balance sheet. Admission and Withdrawal of Partners Admission of a Partner Admission of a new partner = legal dissolution of existing partnership and start of a new one To recognize the economic effects, open capital accounts for each new partner. A new partner is admitted by either: - Purchasing the interest of an existing partnership - Involves only a transfer of Capital among the partners who are involved in the transaction: TOTAL CAPITAL IS NOT IMPACTED - Investing assets in the partnership - Increases both net assets and total capital of the partnership.
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