Locke, Niece and Munster are in partnership with an agreement to share profits in the ratio 3:2:1.

They also agree the following terms.

(a) All three should receive interest at 12% on capital.

(b) Munster should receive a salary of $6,000 per annum.

(c) Interest will be charged on drawings at the rate of 5% (charged on the end of year drawings balances).

(d) The interest rate on the loan by Locke is 5%.

 

The statement of financial position of the partnership as at 31 December 20X5 revealed the following.

 

The net profit for the year to 31 December 20X6 was $24,530 (excluding loan interest).

 

Locke, Niece and Munster are seeking your assistance in the allocation of profits and determining their account balances.

a.You are being asked to prepare:

 

i.Profit and loss appropriation account.

ii.Partners current account.

b. The partners are unsure as to whether the interest on the loan from Locke should be accounted for in the Income Statement or in the Profit and Loss Appropriation Account. Explain to them how it should be treated.

Transcribed Image Text:

Capital accounts: Locke Niece Munster Current accounts: Locke Niece Munster Loan account (Locke) Capital employed to finance net long-term assets and working capital Drawings made during the year to 31 December 20X6 were as follows: Locke Niece Munster 69 20,000 8,000 6,000 3,500 (700) 1,800 69 34,000 4,600 6,000 44,600 6,000 4,000 7,000 Capital accounts: Locke Niece Munster Current accounts: Locke Niece Munster Loan account (Locke) Capital employed to finance net long-term assets and working capital Drawings made during the year to 31 December 20X6 were as follows: Locke Niece Munster 69 20,000 8,000 6,000 3,500 (700) 1,800 69 34,000 4,600 6,000 44,600 6,000 4,000 7,000