Question

Mike and Rachel form M&R Partnership. Mike invests $40,000 cash and Rachel invests $60,000 cash. The partners agree to share income as follows: Mike gets a salary allowance of $5,000 per year and Rachel gets a salary allowance of $9,000 per year; both get an annual interest allowance of 10% on their initial investment; and any remaining balance is shared equally. Net income for the year is $30,000. Also, Mike withdrew $1,000 cash from the partnership and Rachel withdrew $2,000. Prepare a statement of partners’ equity for the year ended December 31. (Do not round intermediate calculations. Enter all allowances as positive values. Enter losses and withdrawals as negative values.)

Answer 1

The Preparation of statement of partners’ equity is shown below

Step-by-step explanation:

The preparation of statement of partners’ equity is shown below:-

Mike Rachel

Beginning equity $40,000 $60,000

Salary allowance $5,000 $9,000

Interest allowance $4,000 $6,000

Share of remaining net income $3,000 $3,000

Drawings -$1,000 -$1,000

Ending equity $51,000 $77,000

Working Note

Interest allowance for Mike = $40,000 × 10%

= $4,000

Interest allowance for Rachel = $60,000 × 10%

= $6,000

Remaining share of net income after salary allowance and interest allowance = Net income - Salary allowance - Interest allowance

= $30,000 - $5,000 - $9,000 - $4,000 - $6,000

= $6,000

Mike's share of remaining income = $6,000 × 50%

= $3,000

Rachel's share of remaining income = $6,000 × 50%

= $3,000