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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

Dylan Howell and Demond Nickles have decided to form a partnership. They have agreed that Howell is to invest $50,000 and that Nickles is to invest 575,000. Howell is to devote full time to the business, and Nickles is to devote one-half 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 10% on original investments and the remainder in the ratio of 3:2
  5. e. Interest of 10% on original investments, salary allowances of $38,000 to Howell and 519,000 to Nickles, and the remainder equally.

Plan (e), except that Howell 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 1420,000 and (2) net income of $150,000. Present the data in tabular form, using the following columnar headings:

  $420,000 $150,000
Plan Howell Nickels Howell Nickels

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 $420,000and $150,000under different plans.

Explanation

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

Net Income

 $4,20,000

Net Income

 $1,50,000

H N H N
Plan (a)
Income sharing ratio under this plan is equal. So, the ratio is 1:1
Distribution of Net Income (1:1) $210,000 $210,000 $75,000 $75,000
Plan (b)
Income sharing ratio under this plan is the ratio of original investment by H and N i.e. $50,000 & $75,000 respectively. So, the ratio is 2:3
Distribution of Net Income (2:3) $168,000 $252,000 $60,000 $90,000
Plan (c)
Income sharing ratio under this plan is the ratio of time devoted by H and N i.e. full time & 1/2 time respectively. So, the ratio is 2:1
Distribution of Net Income (2:1) $280,000 $140,000 $100,000 $50,000
Plan (d)
Interest allowance (1) $5,000 $7,500 $5,000 $7,500
Income sharing ratio under this plan is 3:2. Any income left after allowing interest on capital will be distributed in 3:2 ratio.
Remaining Income (3:2) $244,500 $163,000 $82,500 $55,000
Net Income $249,500 $170,500 $87,500 $62,500
Plan (e)
Interest allowance (1) $5,000 $7,500 $5,000 $7,500
Salary allowance $38,000 $19,000 $38,000 $19,000
Any excess income left after deducting interest and salary allowance will be distributed among partners equally. So, the income or loss sharing ratio is 1:1
Remaining Income (1:1) $175,250 $175,250 $40,250 $40,250
Net Income $218,250 $201,750 $83,250 $66,750
Plan (f)
Interest allowance (1) $5,000 $7,500 $5,000 $7,500
Salary allowance $38,000 $19,000 $38,000 $19,000
Bonus allowance (2) $72,600 $18,600
Any excess income left after deducting interest, bonus and salary allowance will be distributed among partners equally. So, the income or loss sharing ratio is 1:1
Remaining Income (1:1) $138,950 $138,950 $30,950 $30,950
Net Income $254,550 $165,450 $92,550 $57,450

Table (2)

Calculation of Interest Allowances(1)

InterestAllowance=(Capitalbalance×10100)

Share of H:

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