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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Dividing partnership income

Morrison and Greene have decided to form a partnership. They have agreed that Morrison is to invest $150,000 and that Greene is to invest $50,000. Morrison is to devote one-half time to the business, and Greene is to devote full time. The following plans for the division of income are being considered:

  1. a. Equal division
  2. b. In the ratio of original investments
  3. c. In the ratio of time devoted to the business
  4. d. Interest of 6% on original investments and the remainder equally
  5. e. Interest of 6% on original investments, salary allowances of $40,000 to Morrison and $70,000 to Greene, and the remainder equally
  6. f. Plan (e), except that Greene is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances

Instructions

For each plan, determine the division of the net income under each of the following assumptions: (1) net income of $115,000 and (2) net income of $200,000. Present the data in tabular form, using the following columnar headings:

  $115,000 $200,000
Plan Morrison Greene Morrison Greene

To determine

Partnership

It is that form of organization which is owned and managed by two or more persons who invest and share the profits and losses according to a pre-determined ratio.

To determine: The division of net income of $115,000 and $200,000 under different plans.

Explanation

Working Notes for determining the division of net income between partner M and G under different plans:

Net Income

          $1,15,000

Net Income

 $2,00,000

M G M G
Plan (a)
Income sharing ratio under this plan is equal. So, the ratio is 1:1
Distribution of Net Income (1:1) $57,500 $57,500 $100,000 $100,000
Plan (b)
Income sharing ratio under this plan is the ratio of original investment by M and G i.e. $1, 50,000 & $50,000 respectively. So, the ratio is 3:1
Distribution of Net Income (3:1) $86,250 $28,750 $150,000 $50,000
Plan (c)
Income sharing ratio under this plan is the ratio of time devoted by M and G i.e. 1/2 time & full time respectively. So, the ratio is 1:2
Distribution of Net Income (1:2) $38,333 $76,667 $66,667 $133,333
Plan (d)
Interest allowance (1) $9,000 $3,000 $9,000 $3,000
Income sharing ratio under this plan is equal. Any income left after allowing interest on capital will be distributed equally. So, the income sharing ratio is 1:1
Remaining Income (1:1) $51,500 $51,500 $94,000 $94,000
Net Income $60,500 $54,500 $103,000 $97,000
Plan (e)
Interest allowance (1) $9,000 $3,000 $9,000 $3,000
Salary allowance $40,000 $70,000 $40,000 $70,000
Any excess income or loss left after deducting interest and salary allowance will distributed among partners equally. So, the income or loss sharing ratio is 1:1
Excess allowance over income (1:1) (2) -$3,500 -$3,500
Remaining Income (1:1) $39,000 $39,000
Net Income $45,500 $69,500 $88,000 $112,000
Plan (f)
Interest allowance (1) $9,000 $3,000 $9,000 $3,000
Salary allowance $40,000 $70,000 $40,000 $70,000
Bonus allowance (4) $1,000 $18,000
Any excess income or loss left after deducting interest and salary allowance will distributed among partners equally. So, the income or loss sharing ratio is 1:1
Excess allowance over income (1:1) (3) -$4,000 -$4,000
Remaining Income (1:1) $30,000 $30,000
Net Income $45,000 $70,000 $79,000 $121,000

Table (2)

Calculation of Interest Allowances(1)

InterestAllowance=(Capitalbalance×6100)

Share of M:

InterestAllowance ofM}=($150,000×6100)=$9,000

Share of G:

InterestAllowance ofG}=($50,000×6100)=$6,000

Calculation of Excess Allowances

ExcessAllowance=(Totalinterest+TotalSalary+Bonus-NetIncome)

Plan (e) - (2)

ExcessAllowance=($12,000+$110,000-$115,000)=<

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