Kat and Edd formed the K & E partnership several years ago. Capital account balances on January 1, 2011, were as follows:

Kat .................................. $496,750

Edd ................................. $268,250

The partnership agreement provides Kat with an annual salary of $10,000 plus a bonus of 5 percent of partnership net income for managing the business. Edd is provided an annual salary of $15,000 with no bonus. The remainder is shared evenly. Partnership net income for 2011 was $30,000. Edd and Kat each invested an additional $5,000 during the year to finance a special purchase. Year-end drawing account balances were $15,000 for Kat and $10,000 for Edd.

REQUIRED

1. Prepare an income allocation schedule.

2. Create the journal entries to update the equity accounts at the end of the year.

3. Determine the capital balances as of December 31, 2011.