Calculate Net Income Allocation and Journal Entry for Business Partners

(a) What is the net income allocation and journal entry for Baliva, Masi, and Romalati under the situation of a net income of $500,000 and 7% on capital balances?

(b) What is the net income allocation and journal entry for Baliva, Masi, and Romalati under the situation of a net income of $40,000 and 5% on capital balances?

Answer:

To calculate the net income allocation for Baliva, Masi, and Romalati based on their partnership agreement, we need to consider their salaries, interest on capital balances, and the income ratio.

For situation (a) with a net income of $500,000 and 7% on capital balances:

Baliva's interest on capital = $50,000 * 7% = $3,500
Masi's interest on capital = $50,000 * 7% = $3,500
Romalati's interest on capital = $70,000 * 7% = $4,900

Remaining income after deducting salaries and interest on capital: $500,000 - ($50,000 + $70,000 + $90,000 + $3,500 + $3,500 + $4,900) = $278,100

Net income allocation based on the income ratio:
Baliva's share = 30% * $278,100 = $83,430
Masi's share = 30% * $278,100 = $83,430
Romalati's share = 40% * $278,100 = $111,240

The journal entry to allocate the net income would be:
Income Summary $500,000
Baliva's Capital $83,430
Masi's Capital $83,430
Romalati's Capital $111,240
Salaries Expense $210,000
Interest on Capital $11,900

For situation (b) with a net income of $40,000 and 5% on capital balances:

Baliva's interest on capital = $50,000 * 5% = $2,500
Masi's interest on capital = $50,000 * 5% = $2,500
Romalati's interest on capital = $70,000 * 5% = $3,500

Remaining income after deducting salaries and interest on capital: $40,000 - ($50,000 + $70,000 + $90,000 + $2,500 + $2,500 + $3,500) = -$88,500 (loss)

Net income allocation based on the income ratio:
Baliva's share = 30% * -$88,500 = -$26,550 (negative value indicating loss)
Masi's share = 30% * -$88,500 = -$26,550 (negative value indicating loss)
Romalati's share = 40% * -$88,500 = -$35,400 (negative value indicating loss)

The journal entry to allocate the net loss would be:
Income Summary $40,000
Baliva's Capital -$26,550
Masi's Capital -$26,550
Romalati's Capital -$35,400
Salaries Expense $210,000
Interest on Capital $8,500

Please note that the amounts calculated are based on the given information and the partnership agreement.

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