# 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: a. Equal division b. In the ratio of original investments c. In the ratio of time devoted to the business d. Interest of 10% on original investments and the remainder in the ratio of 3:2 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 BuyFind ### Accounting 27th Edition WARREN + 5 others Publisher: Cengage Learning, ISBN: 9781337272094 BuyFind ### Accounting 27th Edition WARREN + 5 others Publisher: Cengage Learning, ISBN: 9781337272094 #### Solutions Chapter Section Chapter 12, Problem 12.2BPR Textbook Problem ## Dividing partnership incomeDylan 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: a. Equal division b. In the ratio of original investments c. In the ratio of time devoted to the business d. Interest of 10% on original investments and the remainder in the ratio of 3:2 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 allowancesInstructionsFor 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

Expert Solution
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 of Solution

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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