Two people are starting a small IT firm. They come to you for advice on how to form a partnership. They have listed 2 scenarios and are asking you how to make journal entries for each one of the following transactions:
Two partners, A and B, start a partnership.
Partner A’s investment is the following:
Cash: $20,000
Inventory: $30,000
Accounts payable: $50,000
Computer equipment: $40,000
Accumulated depreciation: $20,000
Partner B’s investment is the following:
Cash: $10,000
Computer software: $20,000
Two partners, Small and Big, form a partnership in which Small invested $40,000 and Big invested $60,000 for a total capital of $100,000. But Small devotes more time to the business and earns more from the firm. They have agreed to share the profits as follows:
The first $20,000 is allocated on the partner’s capital balances.
The next $30,000 is allocated based on service: Small gets $20,000, and Big gets $10,000.
Any remaining profits are allocated equally.
The partnership’s net income is $100,000.
What is Small’s portion of the net income? What is Big’s portion of the net income? Make the entry for this allocation.