Terry and Lampard have been in partnership for many years. The profit sharing ratio has always been Terry 60% and Lampard 40%. The net profit for the year ended 31 March 2007 was $520,000. Drogba joined the partnership on 1 January 2007, and introduced $160,000 into the business; $80,000 was for his share of the goodwill. The new profit sharing ratio was agreed as Terry 50%, Lampard 40%, and Drogba 10%.
The balances on the partners' accounts and information on the appropriation of profit is shown below.
Terry
Lampard
Drogba
Interest on drawings (%)
5 p.a.
5 p.a.
5 p.a.
Drawings
$70,000
$90,000
$10,000
Annual salaries
$120,000
$100,000
$50,000
Interest on capital account (%)
10 p.a.
10 p.a.
10 p.a.
Capital accounts at 1 April 2006
$200,000
$70,000
n.a
Current accounts at 1 April 2006
Cr $22,000
Dr $66,000
n.a
Required
(a) Prepare the following accounts for the year ended 31 March 2007: capital and current accounts for each of the partners and the partnership appropriation accounts. The columnar (vertical) format should be used.
(20 marks)
(a) Describe the manner in which the net profit would be appropriated in the absence of a partnership agreement.
