Beau Dawson and Willow McDonald formed a partnership, investing $276,000 and $92,000, respectively. Determine their participation in the year's net income of $136,000 under each of the following independent assumptions: a. No agreement concerning division of net income. b. Divided in the ratio of original capital investment. c. Interest at the rate of 5% allowed on original investments and the remainder divided in the ratio of 2:3. d. Salary allowances of $47,000 and $59,000, respectively, and the balance divided equally. e. Allowance of interest at the rate of 5% on original investments, salary allowances of $47,000 and $59,000, respectively, and the remainder divided equally.

Debit Litigation Expense account $305,090 and Credit Litigation Liability Account with $305,090

Explanation:

The first thing to note is that the entry to be recognized by Buchanan is the entire estimated damages to be paid by him . This is because, he is to identify and recognize all contingencies that are part of the litigation liability. The entire litigation liability is $305,090 hence the entire amount should be recognized.

In the light of this explanation, the Journal entry to record the recognition of loss contingency is as follows:

Accounts Title and Explanation                   Debit               Credit

Litigation Expense                                   $305,090

Litigation Liability                                                              $305,090

Being the record of loss contingency

Note that Litigation expense is an expense account with a debit balance and Litigation liability is a liability account with a credit balance.