Farmer and Taylor formed a partnership with capital contributions of $200,000 and $250,000, respectively. Their partnership agreement calls for Farmer to receive a $70,000 per year salary. The remaining income or loss is to be divided equally. Assuming net loss for the current year is $15,000, the journal entry to allocate the net loss is:

Question

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According to the partnership agreement, Farmer receives a salary of $70,000 per year, which is deducted from the partnership's income before profits or losses are allocated to the partners. Therefore, the loss should be allocated based on the remaining income or loss, which is -$15,000 - $70,000 = -$85,000. Since the income or loss is divided equally after the salary, Taylor's share of the loss is -$42,500 ($85,000/2), and Farmer's share of the loss is also -$42,500 ($85,000/2).

The journal entry to allocate the net loss is:
Debit Taylor, Capital, $42,500;
Debit Farmer, Capital, $42,500;
Credit Income Summary, $85,000 ($70,000 salary + $15,000 loss).

However, the question only asks for the entry to allocate the net loss, not the salary. Therefore, we only need to record the loss portion of the entry, which is:
Debit Taylor, Capital, $42,500;
Credit Income Summary, $15,000;
Credit Farmer, Capital, $27,500 ($42,500 - $15,000).

Thus, the correct answer is C.

Farmer and Taylor Formed a Partnership with Capital Contributions of $200,000