On January 1, 2021, the capital balances in the A&R Partnership are as follows:

Khurram Ali .............................. $53,500
Pradjot Ramsey ........................ $44,000

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 $170,500. There is no partnership agreement.

b. In 2021, the partnership reports profit of $170,500. The income ratio provides for salary allowances of $82,000 to Ali and $33,000 to Ramsey and the remainder to be shared equally.

c. In 2021, the partnership reports profit of $90,000. Assume the partnership agreement calls for income to be divided with a salary of $60,000 to Ali and $55,000 to Ramsey. Ali is allowed 5% of interest on his beginning capital, and the remainder is divided 65%–35%.

Taking It Further

Ali and Ramsey decided to form a partnership and operate a business together. Ali is much more cautious and concerned about keeping expenses to a minimum than Ramsey. Ali also has significantly more personal assets than Ramsey. Should Ali have any concerns about using the partnership form of business organization to operate this business? Explain.