QUESTION 1 (12 marks)

Smith and Jones formed a partnership, with Smith investing $40,000 and Jones $30,000. They agree to share net profit as follows:

A) no agreement was specified. (3 marks)

B) based on original contributed capital ratio. (3 marks)

C) based on a ratio of 60% Smith, and 40% Jones. (3 marks)

D) based on the following allowance method: (3 marks)

(1) Interest at 15% on contributed capital balances.

(2) Salary allowances of $50,000 to Smith and $40,000 to Jones.

(3) Profit in excess of the amount required to cover the interest and salary allowances to be divided at the ratio of 60% to Smith and 40% to Jones.

Required:

During the year the partnership made a net profit of $120,500, prepare journal entry to transfer the net profit to the partner's capital account of all four (A, B, C & D) settings.

QUESTION 2 (12 marks)

The following are the selected accounts from the trial balance as at January 1, 2018 of the partnership of Arnios and Spiros are as follows:

Debit Credit

Arnios, Initial Capital........................................................... $59,500

Arnois, Drawings.............................................................. $1,300

Spiros, Initial Capital.......................................................... 29,700

Spiros, Drawings............................................................. 700

Loan Receivable - Arnois ......................................... $2,000

Loan Receivable - Spiros ......................................... 8,000

Both partners agreed on the following arrangements on sharing profit and loss:

(1) Interest at 7% on initial capital balances.

(2) Salary allowances of $9,000 to Arnois for managing the business.

(3) 6% per annum interest on loan to Arnois and 8% to Spiros.

(4) Remaining profit or loss to be shared 6:4 by Arnois and Spiros, respectively

Required:

a) In the year the partnership made a net profit of $50,304, show how the profit should be divided between the partners, Arnois and Spiros. Use a template to show your calculation. (7 marks)

b) Prepare journal entry to transfer the net profit to the partner's capital account. (3 marks)

c) Determine Arnois and Spiros' Capital Balance as of December 31, 2018. (2 marks)