It is that form of organization which is owned and managed by two or more persons who invest and share the
To determine: The division of net income of $420,000and $150,000under different plans.
Answer to Problem 12.2BPR
The division of net income of $420,000and $150,000under different plans is as follows:
Net Income $4,20,000 |
Net Income $1,50,000 |
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Plan | H | N | H | N |
a. Equal division | $210,000 | $210,000 | $75,000 | $75,000 |
b. In the ratio of original investment | $168,000 | $252,000 | $60,000 | $90,000 |
c. In the ratio of time devoted to the business | $280,000 | $140,000 | $100,000 | $50,000 |
d. Interest of 10% on original investments and remainder in the ratio of 3:2 | $249,500 | $170,500 | $87,500 | $62,500 |
e. Interest of 10% on original investments, salary allowances of $38,000 to H and $19,000 to N, and the remainder equally | $218,250 | $201,750 | $83,250 | $66,750 |
f. Plan (e) except that H is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances. | $254,550 | $165,450 | $92,550 | $57,450 |
Table (1)
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)
Share of H:
Share of N:
Calculation of Bonus Allowances (2)
When Net income = $420,000
When Net income = $150,000
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