Caitlin Maguire and Fiona Whelan, two college friends, decided to set up a house-cleaning business called Maguire & Whelan Cleaning Services. On January 1, 2021, they put their resources together, shook hands, and started their business. Maguire contributed cash of $2,500 and Whelan contributed cash of $8,750. At the end of the fi rst year of business, Caitlin, who was studying accounting, provided the following information:

Additional information:1. Salaries expense is $12,000 and $8,000 cash paid to Caitlin and Fiona, respectively, during the year.

2. All revenues were collected in cash.

3. All supplies were paid for in cash. At the end of the year, there were no supplies on hand.

4. Once formed, the partnership purchased equipment with a cost of $1,500 and a vehicle with a cost of $8,000. Caitlin estimates that the equipment and vehicle have five-year useful lives, with no residual value. She used the straight-line method to calculate depreciation expense.

5. There is $13,750 in the bank account at December 31, 2021.

Instructions

a. Prepare journal entries to correct the errors, if any, on the income statement.

b. Calculate the correct profit and the amount to be allocated to each partner.

c. Prepare a statement of partners? equity for the year ended December 31, 2021.

d. Prepare a balance sheet at December 31, 2021.

Taking It Further

Caitlin is not happy about how the profit was allocated. She says that she works twice as hard as Fiona. Fiona argues that she made a larger contribution to start the partnership. What should Caitlin and Fiona do to deal with their concerns?

Transcribed Image Text:

MAGUIRE & WHELAN CLEANING SERVICES Income Statement Year Ended December 31, 2021 Service revenue $35,000 Expenses Supplies expense Depreciation expense Salaries expense $ 3,000 1,900 20,000 24,900 Profit $10,100