EXAMPLE 2 RATIO BASED ON AVERAGE CAPITAL BALANCES Journal Entry under method 2

Example 2 ratio based on average capital balances

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EXAMPLE 2- RATIO BASED ON AVERAGE CAPITAL BALANCES Journal Entry under method 2 ACCY112 Spring 2019 54 June 30 P & L Summary $17 000 Profit Distribution $17 000 transfer of profit to distribution account June 30 Profit Distribution $17 000 Erin, Retained Earnings $10 000 Sami, Retained Earnings $7 000 distribution of profit to partners
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WOULD THE JOURNAL ENTRIES UNDER BOTH METHOD CHANGE, IF THE PROFIT AND LOSS SUMMARY ACCOUNT HAD A FINAL DEBIT BALANCE? Would your calculations for allocation of profit or loss be different? ACCY112 Spring 2019 55
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WHERE ALLOWANCES AND INTEREST EXCEED PROFITS EARNED. If the Partnership Agreement does not state specifically how losses should be divided among partners, a loss is also divided in the same way as the profit sharing ratio. ACCY112 Spring 2019 56
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SALARIES AND INTEREST ALLOWANCES The Partnership Agreement may allow for salaries and interest on capital to be paid on the balance of the capital accounts. In the case of partners such salaries and interest allowances are treated as PART OF A PROFIT SHARING ARRANGEMENT. They are NOT treated the same as a salary expense of an employee or an interest expense of a creditor. ACCY112 Spring 2019 57
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EXAMPLE 3- SALARIES AND INTEREST ALLOWANCES John and Jane have capital account balances at the end of the year of $100 000 and $80 000 respectively. Profit of the partnership is $70 000. The profit and loss sharing agreement calls for; (1) a salary of $20,000 to John and $10,000 to Jane, (2) 10 % p.a. interest on capital balances, (3) the residual profit to be split 70 - 30 in favour of John. What is John’s share of the distribution? a) $49 000 b) $45 400 c) $21 000 ACCY112 Spring 2019 58
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EXAMPLE 3- SALARIES AND INTEREST ALLOWANCES The allocation of Profit of $70 000 ACCY112 Spring 2019 59 John Jane Total Interest on capital Salaries to partners Total interest & salary credited Residual divided based on 7:3 Equity increase John Jane Total Interest on capital Salaries to partners Total interest & salary credited Residual divided based on 7:3 Equity increase
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EXAMPLE 3- SALARIES AND INTEREST ALLOWANCES Journal Entry under method 1 ACCY112 Spring 2019 60 June 30 P & L Summary $70 000 Profit Distribution $70 000 transfer of profit to distribution account June 30 Profit Distribution $70 000 John, Capital $45 400 Jane, Capital $24 600 distribution of profit to partners
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EXAMPLE 3- SALARIES AND INTEREST ALLOWANCES OR (method 1) ACCY112 Spring 2019 61 June 30 P & L Summary $70 000 Profit Distribution $70 000 transfer of profit to distribution account June 30 Profit Distribution $18 000 John, Capital $10 000 Jane, Capital $8 000 distribution of interest on capital June 30 Profit Distribution $30 000 John, Capital $20 000 Jane, Capital $10 000 distribution of salaries to partners June 30 Profit Distribution $22 000 John, Capital $15 400 Jane, Capital $6 600
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EXAMPLE 3- SALARIES AND INTEREST ALLOWANCES Journal Entry under method 2 ACCY112 Spring 2019 62 June 30 P & L Summary $70 000 Profit Distribution $70 000 transfer of profit to distribution account June 30 Profit Distribution $70 000 John, Retained Earnings $45 400 Jane, Retained Earnings $24 600 distribution of profit to partners
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EXAMPLE 3- SALARIES AND
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