At the end of its first year of operations, on December 31, 2014, CDW Company's accounts show the following:
Partner Drawings Capital
J. Chapman-Brown.....$10,000.................$30,000
C. Duperé..................8,000..................40,000
H. Weir.....................6,000..................50,000
The capital balance represents each partner's initial capital investment. No closing entries for profit (loss) or drawings have been recorded as yet.
Instructions
(a) Journalize the entry to record the division of profit for the year ended December 31, 2014, under each of the following independent assumptions:
1. Profit is $40,000. Duperé and Weir are given salary allowances of $8,000 and $12,000, respectively. The remainder is shared equally.
2. Profit is $40,000. Each partner is allowed interest of 5% on beginning capital balances. Chapman-Brown, Duperé, and Weir are given salary allowances of $15,000, $20,000, and $18,000, respectively. The remainder is shared in a ratio of 5:3:2.
(b) Journalize the entry to close each partner's drawings account.
(c) Prepare a statement of partners' equity for the year under assumption (2) in (a) above.
Taking It Further
Explain why partnerships such as CDW Company include an interest allowance in their profit- and loss-sharing arrangements.