What is the closing entry to allocate a net income of $48,000 to Sara, Ellen, and Mary? Respective capital balances are $30,000, $40,000, and $30,000. No agreement was made for division of income.
A. Debit Income Summary $48,000; credit Sara’s Capital $16,000; credit Ellen’s Capital $16,000; credit Mary’s Capital $16,000
B. Debit Income Summary $48,000; credit Sara’s Capital $14,400; credit Ellen’s Capital $19,200; credit Mary’s Capital $14,400
C. Debit Salary Expense $48,000; credit Salaries Payable $48,000
My answer is C
Your answer is incorrect. The correct answer to allocate a net income of $48,000 to Sara, Ellen, and Mary with respective capital balances of $30,000, $40,000, and $30,000, would be option A: Debit Income Summary $48,000; credit Sara’s Capital $16,000; credit Ellen’s Capital $16,000; credit Mary’s Capital $16,000.
To understand why option A is the correct answer, let's break down the steps:
1. Debit Income Summary $48,000: The net income of $48,000 needs to be closed to a temporary account called Income Summary.
2. Credit Sara’s Capital $16,000: The net income is allocated based on the capital balances of the partners. Sara's capital balance is $30,000 out of a total of $100,000. Therefore, her share would be 30,000/100,000 * $48,000 = $14,400. This amount is subtracted from Sara's capital to allocate her share of the income.
3. Credit Ellen’s Capital $16,000: Following the same logic, Ellen's share would be 40,000/100,000 * $48,000 = $19,200. This amount is subtracted from Ellen's capital to allocate her share of the income.
4. Credit Mary’s Capital $16,000: Mary's share would be 30,000/100,000 * $48,000 = $14,400. This amount is subtracted from Mary's capital to allocate her share of the income.
By doing this closing entry, the net income is allocated to the three partners based on their respective capital balances.