Accounting

Instructions

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:

  1. 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
  2. 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.

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