At the end of its first year of operations, on December 31, 2014, LBG Company's accounts show the following:

PartnerDrawings Capital

S. Little..................$20,000.................$65,000

L. Brown..................15,000..................45,000

P. Gerhardt................10,000..................25,000

The capital balance represents each partner's initial capital investment on January 1, 2014. No closing entries have been recorded for profit (loss) or drawings 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 $55,000. Little, Brown, and Gerhardt are given salary allowances of $5,000, $25,000, and $10,000, respectively. The remainder is shared equally.

2. Profit is $25,000. Each partner is allowed interest of 5% on beginning capital balances. Brown and Gerhardt are given salary allowances of $15,000 and $20,000, respectively. Th e remainder is shared 3:2:1.

(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 LBG Company include a salary allowance in their profit- and loss-sharing arrangements.