Farrell and Jimmy Enter into a Partnership Agreement on 1

question 29

Multiple Choice

Farrell and Jimmy enter into a partnership agreement on 1 May 2017.Farrell contributes $70,000 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 profit for the year ended 31 December 2017 is $80,000.Which of the following is the correct journal entry to record the allocation of profit?

• A) \[\begin{array} { | l | l | l | }
• \hline \text { Farrell, capital } & 25,455 & \\
• \hline \text { jimmy, captial } & 54,545 & \\
• \hline \text { Income summary } & & 80,000 \\
• \hline
• \end{array}\]
• B) \[\begin{array} { | c | c | c | }
• \hline \text { Farrell, captial } & 54,545 & \\
• \hline \text { Jimmy, capital } & & 54,545 \\
• \hline
• \end{array}\]
• C) \[\begin{array} { | c | l | l | }
• \hline \text { Income summary } & 30,000 & \\
• \hline \text { Farrell, capital } & & 25,455 \\
• \hline \text { Jimmy, captial } & & 54,545 \\
• \hline
• \end{array}\]
• D) \[\begin{array} { | c | c | c | }
• \hline \text { Income summary } & 29,090 & \\
• \hline \text { Farrell, capital } & 25,455 & \\
• \hline \text { Jimmy, capital } & & 54,545 \\
• \hline
• \end{array}\]

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Definitions:

Realization

The process of converting non-cash assets into cash or recognizing revenue when it is earned and measurable, regardless of when cash is received.

Partnership Termination

The process of dissolving the business relationship between partners under the terms of a partnership agreement.

Income-Sharing Ratios

Ratios that determine how profits or losses are divided among business partners or stakeholders according to agreed terms.

Capital Balance

The portion of equity attributable to the owners or shareholders in the company, reflecting the initial and additional contributions plus retained earnings minus withdrawals.