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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

Tyler Hawes and Piper Albright formed a partnership, investing $210,000 and $70,000, respectively. Determine their participation in the year’s net income of $290,000 under each of the following independent assumptions: (a) no agreement concerning division of net income; (b) divided in the ratio of original capital investment; (c) interest at the rate of 5% allowed on original investments and the remainder divided in the ratio of 2:3; (d) salary allowances of $36,000 and $45,000, respectively, and the balance divided equally; (e) allowance of interest at the rate of 5% on original investments, salary allowances of $36,000 and $45,000, respectively, and the remainder divided equally.

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 participation of partners in the net income of the year under various independent assumptions.

Explanation

Working Notes:

Calculations of division of net income under various assumptions are as follows:

H A Total
a  Net income (1:1) $145,000 $145,000 $290,000
b  Net income (3:1)(1) $217,500 $72,500 $290,000
c  Interest allowance                       (A)

$10,500

(2)

$3,500

(2)

$14,000
Remaining income (2:3)               (B) $110,400 $165,600 $276,000
Net income                           (A)+(B) $120,900 $169,100 $290,000
d Salary allowance                          (C) $36,000 $45,000 $81,000
Remaining income (1:1)              (D) $104,500 $104,500 $209,000
Net income                           (C)+(D) $140,500 $149,500

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