Locke, Niece and Munster are in partnership with an agreement to share profits in the ratio 3:2:1.

They also agree the following terms.

(a) All three should receive interest at 12% on capital.

(b) Munster should receive a salary of $6,000 per annum.

(c) Interest will be charged on drawings at the rate of 5% (charged on the end of year drawings

balances).

(d) The interest rate on the loan by Locke is 5%.

The statement of financial position of the partnership as at 31 December 20X5 revealed the following.

	$	$
Capital accounts:
Locke	20,000
Niece	8,000
Munster	6,000	34,000
Current accounts:
Locke	3,500
Niece	(700)
Munster	1,800	4,600
Loan account (Locke)		6,000
Capital employed to finance net long-term assets and working capital		44,600
Drawings made during the year to 31 December 20X6 were as follows:
Locke		6,000
Niece		4,000
Munster		7,000

The net profit for the year to 31 December 20X6 was $24,530 (excluding loan interest).

Locke, Niece and Munster are seeking your assistance in the allocation of profits and determining their account balances.

a. You are being asked to prepare:

i. Profit and loss appropriation account

ii. Partners current account

b. The partners are unsure as to whether the interest on the loan from Locke should be accounted for in the Income Statement or in the Profit and Loss Appropriation Account. Explain to them how it should be treated.