Question

Required information [The following information applies to the questions displayed below.] Ries, Bax, and Thomas invested $52,000,$68,000, and $76,000, respectively, in a partnership. During its first calendar year, the firm earned $355,200. Required: Prepare the entry to close the firm's Income Summary account as of its December 31 year-end and to allocate the $355,200 net income under each of the following separate assumptions. 1. The partners did not agree on a plan, and therefore share income equally. Journal entry worksheet Record the entry to close the income summary account assuming the partners did not agree on a plan, and therefore share income equally. Note: Enter debits before credits.

Answer 1

The journal entry to distribute $355,200 of net income equally among Ries, Bax, and Thomas when no agreement is in place is to debit the Income Summary and credit each partner's capital account for $118,400. The firm's accounting profit from a separate scenario was calculated to be $50,000 after subtracting explicit costs from total revenues.

Step-by-step explanation:

Journal Entry for Income Summary Account

The student's question deals with the allocation of net income to partners in a partnership when no agreement on the distribution exists. For such a case, the net income is shared equally among the partners. Assuming Ries, Bax, and Thomas did not agree on a plan for sharing the net income of $355,200, each partner would receive an equal share. Therefore, the journal entry to close the income summary account and allocate the net income equally would be:

• 
  
• Debit Income Summary $355,200
• 
  
• Credit Ries, Capital $118,400
• 
  
• Credit Bax, Capital $118,400
• 
  
• Credit Thomas, Capital $118,400

The above entry ensures the net income is distributed equally among partners, closing the Income Summary account.

Calculating Accounting Profit

Using the information from the self-check question, the firm's accounting profit is calculated as total revenues minus explicit costs. Given that the sales revenue was $1 million and the costs for labor, capital, and materials were $600,000, $150,000, and $200,000 respectively, the accounting profit is:

Accounting profit: = $1,000,000 - ($600,000 + $150,000 + $200,000) = $50,000.

This calculation only takes into account the explicit costs and ignores any implicit costs such as opportunity costs associated with the business venture.