Question

1. Farmer and Taylor formed a partnership with capital contributions of $280,000 and $330,000, respectively. Their partnership agreement calls for Farmer to receive a $86,000 per year salary. The remaining income or loss is to be divided equally. Assuming net income for the current year is $231,000, the journal entry to allocate net income is:

2. Christie and Jergens formed a partnership with capital contributions of $210,000 and $310,000, respectively. Their partnership agreement calls for Christie to receive a $51,000 per year salary. Also, each partner is to receive an interest allowance equal to 9% of a partner's beginning capital investments. The remaining income or loss is to be divided equally. If the net income for the current year is $117,000, then Christie and Jergens's respective shares are:

Answer 1

Question 1:

In a partnership, the income of the partnership is to be divided (allocated) among the partners in their profit sharing ratio, after adjusting any salary payable, interest on capital and interest on drawings, if any, payable to the partners.

Farmer is entitled to a salary of $86000. So farmer will be paid his salary first from the current year income and the balance will be allocated to the partners equally.

Balance of income left for allocation among partners= 231000-86000= $150000

Journal entry for income allocation

Account names	Debit ($)	Credit ($)
Income summary	150000
Farmer capital(150000/2)		75000
Taylor capital(150000/2)		75000

Question 2:

The theory of question 1 applies here also.

Computation of income left for allocation among partners

	$
Net income of the current year	117000
(-) Christie's salary	(51000)
(-) interest on Christie's capital (210000*9%)	(18900)
(-) interest on Jergen's capital (310000*9%)	(27900)
Net income left for allocation	19200

After computation of income left for allocation among partners, we have to allocate the income equally as mentioned in the question. The income allocated will be added to the capital share of the partners. However, if it was a loss, such loss allocated will be reduced from the respective capital share of each partner. Here, there is income and the respective share of each partner is computed as shown below:

	Christie	Jergen
Capital contributed	210000	310000
(+) Income allocated (19200 equally)	9600	9600
(+) Salary	51000
(+) Interest on capital	18900	27900
Partner's share of capital	289500	347500

Notes:

1. It is mentioned to compute the respective share of the partners. This means, the capital after the distribution of income of the current year is to be found.
2. Since it is asked to compute share of each partner, salary and interest on capital along wih income allocated will also be added to the beginning capital contributions of each of the partners.
3. The interest on capital is to be computed on opening capital @ 9%.
4. The profit sharing ratio is given to be 1:1(ie, shared equally)