Question

E12-16 Allocating profits and losses to the partners 

Polacco and Walsh have formed a partnership. During their first year of operations, the partnership earned $140,000. Their profit-and-loss-sharing agreement states that, first, each partner will receive 10% of their capital balances. The second level is based on services, with $25,000 to Polacco and $15,000 to Walsh. The remainder then will be shared 4:1 between Polacco and Walsh, respectively. 

Requirements

 1. Calculate the amount of income each partner will receive under their profit-and- loss-sharing agreement assuming Polacco's capital balance is $78,000 and Walsh's capital balance is $78,000.

 2. Journalize the entry to close the Income Summary account for the year. 

Answer 1

1.

	Polacco	Walsh	Total
Net income			$140,000
10% of capital	$7,800	$7,800	(15,600)
Salary	25,000	15,000	(40,000)
			84,400
Allocation of remaining balance	67,520	16,880	(84,400)
Total	$100,320	$39,680	$0

General Journal	Debit	Credit
Income summary	$140,000
Polacco, capital		$100,320
Walsh, capital		39,680