Determine the division of net income of $105,000and $180,000 under different plans.
Explanation of Solution
The division of net income of $105,000and $180,000 under different plans is as follows:
Net Income $1,15,000 |
Net Income $180,000 | ||||
Plans | M | A | M | A | |
a | Equal division | $52,500 | $52,500 | $90,000 | $90,000 |
b | In the ratio of original investment | $78,750 | $26,250 | $135,000 | $45,000 |
c | In the ratio of time devoted to the business | $35,000 | $70,000 | $60,000 | $120,000 |
d | Interest of 12% on original investments and remainder equally | $58,500 | $46,500 | $96,000 | $84,000 |
e | Interest of 12% on original investments, salary allowances of $30,000 to M and $64,000 to G, and the remainder equally | $41,500 | $63,500 | $79,000 | $101,000 |
f | Plan (e) except that G is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances. | $40,400 | $64,600 | $70,400 | $109,600 |
Table (1)
Working Notes for determining the division of net income between partner M and A under different plans:
Net Income $1,15,000 |
Net Income $180,000 | |||
M | A | M | A | |
Plan (a) | ||||
Income sharing ratio under this plan is equal. So, the ratio is 1:1 | ||||
Distribution of Net Income (1:1) | $52,500 | $52,500 | $90,000 | $90,000 |
Plan (b) | ||||
Income sharing ratio under this plan is the ratio of original investment by M and A i.e. $1, 40,400 & $40,400 respectively. So, the ratio is 3:1 | ||||
Distribution of Net Income (3:1) | $78,750 | $26,250 | $135,000 | $45,000 |
Plan (c) | ||||
Income sharing ratio under this plan is the ratio of time devoted by M and A i.e. 1/2 time & full time respectively. So, the ratio is 1:2 | ||||
Distribution of Net Income (1:2) | $35,000 | $70,000 | $60,000 | $120,000 |
Plan (d) | ||||
Interest allowance (1) | $18,000 | $6,000 | $18,000 | $6,000 |
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) | $40,500 | $40,500 | $78,000 | $78,000 |
Net Income | $58,500 | $46,500 | $96,000 | $84,000 |
Plan (e) | ||||
Interest allowance (1) | $18,000 | $6,000 | $18,000 | $6,000 |
Salary allowance | $30,00 | $64,000 | $30,000 | $64,000 |
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) | -$6,500 | -$6,500 | ||
Remaining Income (1:1) | $31,000 | $31,000 | ||
Net Income | $41,500 | $63,500 | $79,000 | $101,000 |
Plan (f) | ||||
Interest allowance (1) | $18,000 | $6,000 | $18,000 | $6,000 |
Salary allowance | $30,000 | $64,000 | $30,000 | $64,000 |
Bonus allowance (4) | $2,200 | $17,200 | ||
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) | -$7,600 | -$7,600 | ||
Remaining Income (1:1) | $22,400 | $22,400 | ||
Net Income | $40,400 | $64,000 | $70,400 | $109,600 |
Table (2)
Calculation of Interest Allowances – (1)
Share of M:
Share of A:
Calculation of Excess Allowances –
Plan (e) - (2)
Profit sharing ratio of M and A = 1:1
Share of M:
Share of A:
Plan (f) - (3)
Profit sharing ratio of M and A = 1:1
Share of M:
Share of A:
Calculation of Bonus Allowances (4)
When Net income = $105,000
When Net income = $180,000
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