Larry Watson and Larry Lewis own Larry's Antiques. Their partnership agreement provides for annual salary allowances of $100,000 for Watson and $90,000 for Lewis, and interest of 10 percent on each partner's invested capital at the beginning of the year. The remainder of the net income or loss is to be distributed 50 percent to Watson and 50 percent to Lewis. The partners withdraw their salary allowances monthly. On January 1, 2016, the capital account balances were Watson, $500,000, and Lewis, $460,000. On December 15, 2016, Lewis made a permanent withdrawal of $110,000. The net income for 2016 was $420,000.
Instructions
1. Prepare the general journal entry on December 15, 2016, to record the permanent withdrawal by Lewis.
2. Prepare the general journal entries on December 31, 2016, to:
a. Record the salary allowances for the year.
b. Record the interest allowances for the year.
c. Record the division of the balance of net income.
d. Close the drawing accounts into the capital accounts, assuming that Watson and Lewis have withdrawn their full salary allowances.
3. Prepare a schedule showing the division of net income to the partners as it would appear on the income statement for 2016.
4. Prepare a statement of partners' equities showing the changes that took place in the partners' capital accounts during 2016.
Analyze: By what percentage did Watson's capital account increase in the fiscal year 2016?