Veda Storey and Gordon Rogers have a partnership agreement with the following provisions for sharing profit or loss:
1. A salary allowance of $30,900 to Storey and $39,700 to Rogers
2. An interest allowance of 5% on capital balances at the beginning of the year
3. TheremaindertobedividedbetweenStoreyandRogersona2:3basis
The capital balances on January 1, 2017, for Storey and Rogers were $82,000 and $101,000, respectively. For the year ended December 31, 2017, the Storey Rogers Partnership had sales of $340,000; cost of goods sold of $250,000; operating expenses of $130,000; V. Storey drawings of $24,000; and G. Rogers drawings of $28,800.
Instructions
(a) Prepare an income statement for Storey Rogers Partnership for the year.
(b) Prepare a schedule to show how the profit or loss will be allocated to the two partners.
(c) Prepare a statement of partners' equity for the year.
(d) Prepare closing entries at December 31.
TAKING IT FURTHER
Assume that gross profit was lower than expected for 2017 because Rogers sold a significant amount of inventory to friends at substantially reduced prices. These arrangements were made without Storey's approval. She therefore argues that she should be allocated her salary allowance and the remaining loss should be allocated to Rogers. Is this reasonable?