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.)

The Preparation of statement of partners’ equity is shown below

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

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