Zheng invested $100,000 and Murray invested $200,000 in a partnership. They agreed to share incomes and losses by allowing a $60,000 per year salary allowance to Zheng and a $40,000 per year salary allowance to Murray, plus an interest allowance on the partners' beginning-year capital investments at 10%, with the balance to be shared equally. Assuming net income for the current year is $105,000, the journal entry to allocate net income is:

Question

Quizplus · Accepted Answer

To allocate net income, we first need to calculate the interest allowance on the partners' beginning-year capital investments:

- Zheng's investment of $100,000 at 10% = $10,000
- Murray's investment of $200,000 at 10% = $20,000
- Total interest allowance = $30,000

Next, we subtract the salary allowances from each partner's share of the interest allowance:

- Zheng's share = $60,000 - $60,000 salary allowance - $7,500 (half of the remaining interest allowance) = $-7,500 (negative amount indicates a net loss)
- Murray's share = $40,000 - $40,000 salary allowance - $7,500 (half of the remaining interest allowance) = $-7,500 (negative amount indicates a net loss)

Since both partners had a net loss after the salary and interest allowances were deducted, the remaining net income of $105,000 will be split equally between them:

- Zheng's share = $52,500
- Murray's share = $52,500

Therefore, the journal entry to allocate net income is:

Debit Income Summary, $105,000; Credit Zheng, Capital, $57,500, Credit Murray, Capital, $47,500.

Zheng Invested $100,000 and Murray Invested $200,000 in a Partnership