Question

Farmer and Taylor formed a partnership with capital contributions of $225,000 and $275,000, respectively. Their partnership agreement calls for Farmer to receive a $80,000 per year salary. The remaining income or loss is to be divided equally. Assuming net loss for the current year is $20,000, the journal entry to allocate the net loss is:

Multiple Choice

• Debit Income Summary, $20,000; Credit Taylor, Capital, $10,000; Credit Farmer, Capital, $10,000.

• Debit Income Summary, $20,000; Debit Farmer, Capital, $30,000; Credit Taylor, Capital, $50,000.

• Debit Income Summary, $20,000; Debit Taylor, Capital, $30,000; Credit Farmer, Capital, $50,000.

• Debit Income Summary, $20,000; Credit Farmer, Capital, $10,000; Credit Taylor, Capital, $10,000.

• Debit Taylor, Capital, $50,000; Credit Income Summary, $20,000; Credit Farmer, Capital, $30,000.

Answer 1

Answer

• $ 80000 is to be given to FARMER.
• Net Loss after Salary allowance of $ 80000 = $ 20000 net loss + $ 80000 = $ 100,000
• Net Loss divided equally between farmer and Taylor = $ 50000 each [$ 100000 x 50%]
• Hence,
  Amount of Gain (Loss) to Farmer = $ 80000 salary - $ 50000 loss = $ 30,000
  Amount of Gain (Loss) to Taylor = $ (50000)
• Correct Answer = Option #5:
  [Debit] Taylor Capital for $ 50,000
  [Credit] Income Summary $ 20,000 [which is the debit balance representing Net Loss]
  [Credit] Farmer Capital $ 30,000