I have a 2TB external on my iMac 24", I use this drive for my 20" too, and this is what I did
on the iMac

enable file sharing (found in system preference). (I find it useful to give the computer a name). click the edit button under the Computer name, click the "Advertise services in this domain using Bonjour".

click on the HD icon for the external drive, then from the finder menu, under the file menu, get info. (or you can left mouse click over the icon for the external HD, and then select get info from pop up menu). check the share folder icon
on the other computer you want to see the share drive

double click on the Macintosh HD icon, on the left side of the screen you will see under share the name of the imac, click on it. it should show all the drives that are being shared.

if you are not seeing a the shared iMac, in finder click the go menu item, then select connect to server, click the browse button, you should see the iMac, click it and it will connect to it.

now in system preferences, click the time machine icon, selected the disk
and you should be good to go.