Farrell and Jimmy enter into a partnership agreement on May 1, 2015. Farrell contributes $50,000 and Jimmy contributes $150,000 as their capital contributions. They decide to share profits and losses in the ratio of their respective capital account balances. The net income for the year ended December 31, 2015 is $60,000. Which of the following is the correct journal entry to record the allocation of profit?

Question

Quizplus · Accepted Answer

The allocation of profit would be based on the ratio of their respective capital account balances, which are $50,000 for Farrell and $150,000 for Jimmy. Therefore, Farrell's share of profit would be (50,000/200,000) x $60,000 = $15,000 and Jimmy's share would be (150,000/200,000) x $60,000 = $45,000. To record this allocation of profit, we need to credit the net income account with $60,000 and debit Farrell's capital account with $15,000 and Jimmy's capital account with $45,000. Therefore, the correct journal entry is:

Debit        Credit
Farrell's capital account $15,000
Jimmy's capital account   $45,000
Net income                                  $60,000

Farrell and Jimmy Enter into a Partnership Agreement on May