Karen White and Joe Black agreed to share the annual net incomes or losses of their partnership as follows. If the partnership earns a net income, the first \(\$ 50,000\) is allocated \(25 \%\) to White and \(75 \%\) to Black so as to reflect the time devoted to the business by each partner. Income in excess of \(\$ 50,000\) is shared equally. However, if business operations result in a loss for the year, the partners have agreed to share the loss equally.

\section*{Required}

1. Prepare a schedule showing how the 1990 net income of \(\$ 59,000\) should be allocated to the partners.

2. Immediately after the closing entries for 1990 were posted on December 31, 1990 , the partners discover \(\$ 70,000\) of unrecorded accounts payable. These accounts payable relate to expenses incurred by the business. Black suggests that the \(\$ 70,000\) should be allocated equally between the partners as a loss. White disagrees and argues that an entry should be made to record the accounts payable and correct the capital accounts to reflect an \(\$ 11,000\) net loss for 1990.

(a) Present the January 1, 1991, journal entry to record the accounts payable and allocate the loss to the partners according to Black's suggestion.

(b) Now give the January 1, 1991, journal entry to record the accounts payable and correct the capital accounts according to White's argument. Show how you calculated the amounts in the entry.
3. Which partner do you think is right? Why?