Questions

Below is one acceptable solution that shows the income allocation, the necessary journal entries, and the computation of year‐end capital balances.

Step 1. Income Allocation Schedule

The partnership agreement provides that:

• Kat receives a fixed salary of $10,000 plus a bonus of 5% of net income.
• Edd receives a fixed salary of $15,000.
• The remaining profit is shared equally.

Given:

• Partnership net income for 2016 = $30,000.

Compute Kat’s Bonus:

$$\text{Bonus for Kat} = 5\% \times \$30,000 = \$1,500.$$

Total “fixed” amounts:

• Kat’s total fixed amount = Salary + Bonus = $10,000 + $1,500 = $11,500.
• Edd’s salary = $15,000.

Total fixed amounts = $11,500 + $15,000 = $26,500.

Remaining profit to be shared equally:

$$\text{Remaining profit} = \$30,000 - \$26,500 = \$3,500,$$

so each gets

$$\text{Residual share} = \frac{\$3,500}{2} = \$1,750.$$

Thus, final allocated income:

• Kat: $10,000 + $1,500 + $1,750 = $13,250.
• Edd: $15,000 + $1,750 = $16,750.

Check: $13,250 + $16,750 = $30,000.

Step 2. Journal Entries for 2016

Assume that at the beginning of the year the partners’ capital balances are as follows:

• Kat Capital, January 1, 2016: $496,750
• Edd Capital, January 1, 2016: $268,250

(a) Record the Allocation of Net Income

Entry 1 – Allocation of Partnership Net Income

   Dr. Income Summary                   30,000
         Cr. Kat, Capital                              13,250
         Cr. Edd, Capital                              16,750

This entry allocates the $30,000 net income to Kat and Edd according to the schedule above.

(b) Record Additional Investments

Each partner invested an additional $5,000 during the year.

Entry 2 – Additional Investment

   Dr. Cash                              10,000
         Cr. Kat, Capital                               5,000
         Cr. Edd, Capital                               5,000

(c) Record Partner Drawings

At year end, drawings were:

• Kat withdrew $15,000.
• Edd withdrew $10,000.

Entry 3 – Record Drawings

   Dr. Kat, Drawing                      15,000
   Dr. Edd, Drawing                      10,000
         Cr. Cash                                     25,000

Note: Drawings reduce the capital accounts (they are closed to Capital at year end).

Step 3. Determine Year‐End Capital Balances

Start with the beginning balances, add the allocated net income and additional investments, then subtract drawings.

For Kat:

1. Beginning capital: $496,750
2. Add allocated net income: $13,250
     New balance = $496,750 + $13,250 = $510,000
3. Add additional investment: $5,000
     New balance = $510,000 + $5,000 = $515,000
4. Subtract drawings: $15,000
     Year‐end capital = $515,000 – $15,000 = $500,000

For Edd:

1. Beginning capital: $268,250
2. Add allocated net income: $16,750
     New balance = $268,250 + $16,750 = $285,000
3. Add additional investment: $5,000
     New balance = $285,000 + $5,000 = $290,000
4. Subtract drawings: $10,000
     Year‐end capital = $290,000 – $10,000 = $280,000

Final Answers

(a) Income Allocation Schedule

(b) Journal Entries:

1. Allocation of Net Income:

      Dr. Income Summary              30,000
            Cr. Kat, Capital                          13,250
            Cr. Edd, Capital                          16,750
   

2. Additional Investments:

      Dr. Cash                        10,000
            Cr. Kat, Capital                           5,000
            Cr. Edd, Capital                           5,000
   

3. Record Drawings:

      Dr. Kat, Drawing                15,000
      Dr. Edd, Drawing                10,000
            Cr. Cash                                 25,000
   

(c) December 31, 2016 Capital Balances:

• Kat: $500,000
• Edd: $280,000

This completes the solution.