Farmer and Taylor formed a partnership with capital contributions of $250,000 and $300,000, respectively. Their partnership agreement stipulates that Farmer will receive an annual salary of $80,000. Any remaining income or loss will be divided equally. Assuming the net income for the current year is $195,000, the journal entry to allocate net income would be as follows:

 To allocate the net income of $195,000 to the partners Farmer and Taylor according to the partnership agreement, we first need to calculate the amount allocated to Farmer as an annual salary and then divide the remaining income equally between Farmer and Taylor.

Step 1: Allocate Farmer's annual salary According to the agreement, Farmer is to receive an annual salary of $80,000. This amount is allocated to Farmer straight away from the net income.

Step 2: Calculate the remaining income Subtract Farmer's salary from the net income to find the remaining income. Remaining income = Net income - Farmer's salary Remaining income = $195,000 - $80,000 Remaining income = $115,000

Step 3: Split the remaining income equally This remaining income is to be divided equally between Farmer and Taylor. Each partner's share of the remaining income = $115,000 / 2 Each partner's share = $57,500

Step 4: Prepare the journal entry Now we have all the information we need to allocate the net income. The journal entry would be:

: Net Income $195,000 Farmer, Capital $137,500 ($80,000 salary + $57,500 remaining income) Taylor, Capital $57,500 (remaining income)

This journal entry decreases the Net Income account by crediting it and increases each partner's capital account by debiting it with their respective shares of the net income.