X. R. Lopez and L. O. Moore, interior designers, are forming a partnership. Both plan to work in the firm on

a full-time basis. Lopez’s initial investment is $ 20,000; Moore’s investment, $ 30,000. They are considering the following plans for the division of net income: a. Division in the same ratio as the balances of their Capital accounts.

b. Interest of 10 percent on the balances of their Capital accounts at the beginning of the year and the remainder of the net income to be divided equally.

c. Salary allowances of $ 54,000 to Lopez and $ 57,000 to Moore based on the value of their services, interest of 9 percent on the balances of their Capital accounts at the beginning of the year, and the remainder of the net income to be divided equally.

Required

1. Using the form provided in the Working Papers, record the distribution of net income for each of the partners, assuming

(a) A net income of $ 117,000

(b) A net income of $ 104,000.

2. Which plan is the fairest? Give reasons for your opinion.

3. Assume that three years later, on December 31, 20—, Lopez’s Capital balance is $ 47,000. With the approval of Moore, Lopez sells his interest to two new partners, E. S. Clark for $ 23,000 and P. S. Lewis for $ 24,000. Journalize the entry to account for the transfer of ownership.

4. (a) Assume that L. O. Moore, the remaining original partner, decides to withdraw from the partnership two years after Lopez’s sale of his partnership share. The partnership agreement stipulates that net income and net loss be shared on a 2: 1: 1 ratio (Moore, Clark, and Lewis, respectively) and that an examination and revaluation of assets take place upon retirement of a partner. The revaluation shows that Merchandise Inventory is undervalued by $ 9,000 that Equipment is overvalued by $ 2,100, and that Allowance for Doubtful Accounts should be increased by $ 600. As of December 31, journalize the allocation of the net difference between debits and credits to the partners’ Capital accounts according to the 2: 1: 1 ratio.

(b) Assume that L. O. Moore’s Capital balance is $ 65,000 before the revaluation. Journalize on December 31, 20—, the withdrawal of Moore assuming that he withdraws cash.