Sonny Shade, Roni Rain, and Chloe Cloud form the Stormy Season partnership. Sonn

Question

Sonny Shade, Roni Rain, and Chloe Cloud form the Stormy Season partnership. Sonny has a capital balance of $200,000; Roni $300,000; and Chloe $600,000. Income and loss allocated based on (1) salaries given to Sonny $70,000, Roni $40,000 and Chloe $20,000; (2) 10% interest based on their capital balances; (3) remainder divided equally. Calculate the amount of net income to be allocated to each partner if net income is $255,000. Assume the same facts as seen above but instead of net income there is a net loss of $45,000. Calculate the amount of net loss to be allocated to each partner and the required journal entry to close income summary.

Explanation / Answer

Case 1

if we consider that the amount of net income and net loss given in question is after deduction of remuneration and interest then rest of income of $ 255000 is distributed amongst all three partners equally i.e., $255000 in ratio of 1:1:1

= 255000/3 =$85000 profit to each partner

Profit and loss appropriation A/c Dr. $ 255000

To Sonny Shade $85000

To Roni Rane $85000

To Chloe Cloud $85000

(being profits distributed amongst partners equally)

In case of loss $ 45000 will be borne by all the three partners equally i.e., $45000/3 = $15000 each partner.

Sonny Shade Dr $15000

Roni Rane Dr $15000

Chloe Cloud Dr $15000

To profit and loss appropriation A/c $45000

(being loss to be borne by each partner equally)

Case 2

If we consider that profits given are before deduction of remuneration and interest

profit $255000

less: remuneration paid (total) $130000

Less: Interest total @10% $110000

$15000 this profit will be distributed amongst partners equally

Profit and loss appropriation A/c Dr. $ 15000

To Sonny Shade $3000

To Roni Rane $3000

To Chloe Cloud $3000

(being profits distributed amongst partners equally)

In case of loss of $ 45000 only payment of interst is allowed to partners and no remuneration can be paid in situation of loss

so loss will increase by amount of interest to be paid to partners

i.e., $45000+$20000+$30000+$60000 = $155000

Sonny Shade Dr $51666

Roni Rane Dr $51667

Chloe Cloud Dr $51667

To profit and loss appropriation A/c $155000

(being loss to be borne by each partner equally)

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