On January 1, 2021, the capital balances in Gablesmith Partnership are as follows:

Zoya Gable ......................................... $20,000
Matthew Smith ................................. $24,000

Neither partner had any drawings in 2021.

Instructions

Prepare closing entries to allocate the partnership profit under the following situations:

a. In 2021, the partnership reports profit of $90,000. There is no partnership agreement.

b. In 2021, the partnership reports profit of $60,000. The income ratio provides for salary allowances of $42,000 for Gable and $30,000 to Smith and the remainder to be shared equally.

c. In 2021, the partnership reports profit of $60,000. Assume the partnership agreement calls for profit to be divided with a salary of $40,000 to Gable and $30,000 to Smith. Gable is allowed 6% of interest on her beginning capital, and the remainder is divided 70%–30%.

Taking It Further

When Gable and Smith were discussing how profit and losses should be divided, they considered waiting to see who worked the hardest before agreeing on how to share the profit. What are the advantages and disadvantages of doing this?