Reference no: EM132838458
Question 1 - True or False
1. When salary and interest allocations exceed profit, a loss has occurred.
2. The salary, interest and stated ratio method of allocation cannot be applied when a loss has occurred.
3. It is possible to allocate profit or loss to partners based soley on salaries.
4. In the absence of specific agreement, the law requires that partnership profits be divided equally among the partners.
5. The basis on which profits or losses are shared is a matter of agreement among the partners and may not necessarily be the same as their capital contribution ratio.
6. Under the pure capital ratio plan or allocating profits, the partner who invested more capital will ultimately shoulder a bigger share of the loss.
7. When a loss is closed into the partner's capital accounts, income summary is credited.
8. In the absence of any agreement, salaries allowances shall be provided even when operations yielded losses.
9. A partnership contract should be drawn up at the end of each year, prior to distributing profit to the partners.
10. The use of salaries in the allocation of profit or loss allows for the differences in the service that partners provide the business.
11. Profit or losses are divided equally among the partners unless the partnership agreement specifies otherwise.
12. A stipulation that excludes one or more partners from any share in the profits or losses is valid.
13. The profit or losses shall be distributed in conformity with the agreement. If only the share of each partner is the profits has been agreed upon, the share of each is the losses shall be in the same proportion.
14. It is possible to allocate profit or lose to the partners based on interest.
15. It is possible to allocate profit or partners based on the stated ratio.
Question 2 - Rules for the Distribution of Profits or Losses
In January 2018, Nick Marasigan and Dems Asacta agreed to produce and sell chocolate candies. Marasigan contributed P2400000 in cash to the business. Asacta contributed the building and equipment, valued at P2200000 and P1400000, respectively. The partnership had profits of P840000 during 2018 but was less successful during 2019, when profit was only P400000.
Required -
1. Prepare the journal entry to record the investment of both partners in the partnership.
2. Determine the share of profit for each partner in 2018 and 2019 under each of the following conditions:
a. The partners agreed to share profit equally.
b. The partners failed to agree on a profit-sharing arrangement.
c. The partners agreed to share profit according to the ratio of their original investment.
d. The partners agreed to share profits by allowing interest of 10% on their original investments and dividing the remainder equally.
e. The partners agreed to share profits by allowing salaries of P400000 for Marasigan and P280000 for Asacta, and dividing the remainder equally.
f. The partners agreed to share profits by paying salaries of P400000 to Marasigan and P280000 to Asacta, allowing interest of 9% on their original investment, and dividing the remainder equally.