Terry Lam and Chris Tan have a partnership agreement with the following provisions for sharing profit or loss:

1. A salary allowance of $25,000 to Lam and $35,000 to Tan

2. An interest allowance of 6% on capital balances at the beginning of the year

3. The remainder to be divided between Lam and Tan on a 3:4 basis The capital balances on February 1, 2013, for T. Lam and C. Tan were $110,000 and $130,000, respectively. For the year ended January 31, 2014, the Lam Tan Partnership had sales of $395,000; cost of goods sold of $275,000; operating expenses of $150,000; T. Lam drawings of $25,000; and C. Tan drawings of $35,000.

Instructions

(a) Prepare an income statement for the Lam Tan Partnership for the year.

(b) Prepare a schedule to show how the profit or loss is allocated to the two partners.

(c) Prepare a statement of partners' equity for the year.

(d) Prepare closing entries on January 31, 2014.

Taking It Further

In general, what is the relationship between the salary allowance specified in the profit and loss ratio and a partner's drawings?