Chapter 19, Problem 7SPA

1.

To determine

Prepare the lower portion of income statement of the partnership for the year-ended December 30.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement. In partnership, the division is often recorded in the lower portion of the income statement.

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare lower portion of income statement:

Partnership R and B, CPAs
Income Statement (Partial)
For Year Ended December 31
Net income			$135,000
Allocation of net income:	Partner R	Partner B	Total
Salary allowances	$65,000	$35,000	$100,000
Interest allowances	$5,500	$4,500	$10,000
Remaining income	$11,250	$13,750	$25,000
Allocation of net income	$81,750	$53,250	$135,000

Table (1)

2.

To determine

Prepare a statement of partners’ equity for the year ended December 31 and partners’ equity section of the balance sheet on that date.

Explanation of Solution

Statement of Partners’ equity: This statement reports the equity of each partner and summarizes the division of net income for the year.

Statement of partners ‘equity is prepared as follows:

Partnership R and B, CPAs
Statement of Partners’ Equity
For Year Ended December 31
	Person R	Person B	Total
Capital, January 1	$55,000	$45,000	$100,000
Net income for the year	$81,750	$53,250	$135,000
	$136,750	$98,250	$235,000
Withdrawals (salary & interest)	$70,500	$39,500	$110,000
Capital, December 31	$66,250	$58,750	$125,000

Table (2)

Prepare partners’ equity section of the balance sheet on that date:

Partnership R and B, CPAs
Balance Sheet (Partial)
December 31
Partners’ Equity
Partner R, Capital	$66,250
Partner B, Capital	$58,750
Total partners’ equity		$125,000

Table (3)

3.

To determine

Prepare closing entries for the partnership as of December 31.

Explanation of Solution

Closing entries:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts such as revenues account, expenses account and dividend account to the retained earnings account. Closing entries produce a zero balance in each temporary account.

Prepare closing entries:

Date	Account titles and Explanation	Debit	Credit
December 31	Revenues	$215,000
	Income Summary		$215,000
	( To close all revenues to income summary)

Table (4)

• Revenue is a component of partners’ equity and it is decreased. Therefore, debit revenue account by $215,000.
• Income summary is a component of partners’ equity and it is increased. Therefore, credit income summary account by $215,000.

Date	Account titles and Explanation	Debit	Credit
December 31	Income Summary	$80,000
	Expenses		$80,000
	( To close all expenses to income summary)

Table (5)

• Income summary is a component of partners’ equity and it is decreased. Therefore, debit income summary account by $80,000.
• Revenue is a component of partners’ equity and it is increased. Therefore, credit revenue account by $80,000.

Date	Account titles and Explanation	Debit	Credit
December 31	Income Summary	$135,000
	Partner R, Capital		$81,750
	Partner S, Capital		$53,250
	( To close income summary by allocating each partners’ share of net income or net loss to the individual capital account)

Table (6)

• Income summary is a component of partners’ equity and it is decreased. Therefore, debit income summary account by $135,000.
• Partner R, Capital is a component of partners’ equity and it is increased. Therefore, credit Partner R, Capital account by $81,750.
• Partner S, Capital is a component of partners’ equity and it is increased. Therefore, credit Partner S, Capital account by $53,250.

Date	Account titles and Explanation	Debit	Credit
December 31	Partner R, Capital	$70,500
	Partner R, Drawing		$70,500
	( To close each partners’ drawing account to the individual capital accounts)

Table (7)

• Partner R, Capital is a component of partners’ equity and it is decreased. Therefore, debit Partner R, Capital account by $70,500.
• Partner R, Drawing is a component of partners’ equity and it is increased. Therefore, credit Partner R, Drawing account by $70,500.

Date	Account titles and Explanation	Debit	Credit
December 31	Partner B, Capital	$39,500
	Partner B, Drawing		$39,500
	( To close each partners’ drawing account to the individual capital accounts)

Table (8)

• Partner B, Capital is a component of partners’ equity and it is decreased. Therefore, debit Partner B, Capital account by $39,500.
• Partner B, Drawing is a component of partners’ equity and it is increased. Therefore, credit Partner B, Drawing account by $39,500.