Keith Scott and David Dawson agreed to share the annual profit or losses of their corporate law partnership as follows: If the partnership earned a profit, the first $60,000 would be allocated 40% to Scott and 60% to Dawson to reflect the time devoted to the business by each partner. Profit in excess of $60,000 would be shared equally. Also, the] partners have agreed to share any losses equally.

Required

1. Prepare a schedule showing how profit of $72,000 for 2023 should be allocated to the partners.

2. Sometime later in 2024, the partners discovered that $80,000 of accounts payable had existed on December 31, 2023, but had not been recorded. These accounts payable relate to expenses incurred by the business. The partners are now trying to determine the best way to correct their accounting records, particularly their capital accounts. Dawson suggested that they make a special entry crediting $80,000 to the liability account, and debiting their capital accounts for $40,000 each. Scott, on the other hand, suggested that an entry should be made to record the accounts payable and retroactively correct the capital accounts to reflect the balance that they would have had if the expenses had been recognized in 2023. If they had been recognized, the partnership would have reported a loss of $8,000 instead of the $72,000 profit. 

a. Present the journal entry suggested by Dawson for recording the accounts payable and allocating the loss to the partners.

b. Give the journal entry to record the accounts payable and correct the capital accounts according to Scott’s suggestion. Show how you calculated the amounts
presented in the entry.

3. Which suggestion do you think complies with their partnership agreement? Why?