Reference no: EM133159854

Question - Use the information below to answer the questions.

On January 1, 2020, Famish and Campbell started a business making and distributing doughnuts. Famish invested $40,000 cash, and Campbell invested $20,000 money. In the first year of trade, the business made a profit of 25,000, with which both partners were rather pleased.

They have set up a partnership agreement, but they are not sure how much profit they are each allocated. The agreement says the following:

Each partner is to receive a salary of $7,000 per annum.

Interest on capital is to be provided at 4% per annum.

Interest on drawings to be charged at 2% per annum.

The profit balance is to be split in the ratio of 3:2.

On July 1, 2020, Famish and Campbell withdrew $5,000 and $4,000 (respectively) from the business to pay for their annual holiday trip.

Required -

1. How should the operating profit of $25,000 be treated in the profit and loss appropriation account?

2. Famish's Interest in drawings for the year ending December 31, 2020, should be?

3. Campbell's Interest in drawings for the year ending December 31, 2020, should be?

4. How should the partner's salaries be treated in the profit and loss appropriation account?

5. Famish's interest on capital for the year ending December 31, 2020, should be?

6. Should Campbell's interest on capital for the year ending December 31, 2020, be?

7. Total Profit to be shared amongst partners is?

8. What type of balance should the partner's capital accounts have?