Terry Lam and Chris Tan have a partnership agreement with the following provisions for sharing profit or loss: 

1. A salary allowance of $20,000 to Lam and $30,000 to Tan 

2. An interest allowance of 5% on capital balances at the beginning of the year 

3. The remainder to be divided between Lam and Tan on a 3:4 basis 

The capital balances on February 1, 2023, for T. Lam and C. Tan were $100,000 and $120,000, respectively. For the year ended January 31, 2024, the partnership reported a loss of $30,000. The partnership also reported the following: T. Lam drawings of $12,000 and C. Tan drawings of $14,400. 

Instructions 

a. Prepare a schedule to show how the profit or loss is allocated to the two partners. 

b. Prepare a statement of partners’ equity for the year. 

c. Prepare closing entries on January 31, 2024, to allocate the partnership profit and to close the drawings accounts. 

In general, what is the relationship between the salary allowance specified in the profit and loss ratio and a partner’s drawings?