Caitlin Maguire and Fiona Whelan, two college friends, decided to set up a house-cleaning business called Maguire & Whelan Cleaning Services. On January 1, 2014, they put their resources together, shook hands, and started their business. They each contributed the following to the business:

At the end of the first 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. 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, 2014.
Instructions
(a) Prepare the entries to record each partner's investment in the partnership on January 2, 2014.
(b) Prepare journal entries to correct the errors, if any, on the income statement.
(c) Calculate the correct profit and the amount to be allocated to each partner.
(d) Prepare a statement of partners' equity for the year ended December 31, 2014.
(e) Prepare a balance sheet at December 31, 2014.
(f) Prepare closing entries for 2014.
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:

Caitlin Maguire Fiona Whelan Cash Equipment Vehicle Original Cost $ 1,000 Fair Value $1,000 1,500 Original Cost $ 750 Fair Value $ 750 2,000 14,000 8,000 MAGUIRE & WHELAN CLEANING SERVICES Income Statement Year ended December 31, 2014 Service revenue $35,000 Expenses Supplies expense Depreciation expense Salaries expense 3,000 1,900 20,000 24,900 Profit $10,100