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Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124
Textbook Problem

Dividing partnership income

Morrison and Greene have decided to form a partnership. They have agreed that Morrison is to invest $150,000 and that Greene is to invest $50,000. Morrison is to devote one-half time to the business, and Greene is to devote full 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 6% on original investments and the remainder equally
  5. e. Interest of 6% on original investments, salary allowances of $40,000 to Morrison and $70,000 to Greene, and the remainder equally
  6. f. Plan (e), except that Greene 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 $115,000 and (2) net income of $200,000. Present the data in tabular form, using the following columnar headings:

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To determine

Determine division of net income of $115,000 and $200,000 under different plans.

Explanation

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

 

Net Income

          $1,15,000

Net Income

 $2,00,000

 MGMG
Plan (a)    
Income sharing ratio under this plan is equal. So, the ratio is 1:1    
Distribution of Net Income (1:1)$57,500$57,500$100,000$100,000
Plan (b)    
Income sharing ratio under this plan is the ratio of original investment by M and G i.e. $1, 50,000 & $50,000 respectively. So, the ratio is 3:1    
Distribution of Net Income (3:1)$86,250$28,750$150,000$50,000
Plan (c)    
Income sharing ratio under this plan is the ratio of time devoted by M and G i.e. 1/2 time & full time respectively. So, the ratio is 1:2    
Distribution of Net Income (1:2)$38,333$76,667$66,667$133,333
Plan (d)    
Interest allowance (1)$9,000$3,000$9,000$3,000
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)$51,500$51,500$94,000$94,000
Net Income$60,500$54,500$103,000$97,000
Plan (e)    
Interest allowance (1)$9,000$3,000$9,000$3,000
Salary allowance$40,000$70,000$40,000$70,000
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)-$3,500-$3,500  
Remaining Income (1:1)  $39,000$39,000
Net Income$45,500$69,500$88,000$112,000
Plan (f)    
Interest allowance (1)$9,000$3,000$9,000$3,000
Salary allowance$40,000$70,000$40,000$70,000
Bonus allowance (4) $1,000 $18,000
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) (3)-$4,000-$4,000  
Remaining Income (1:1)  $30,000$30,000
Net Income$45,000$70,000$79,000$121,000

Table (2)

Calculation of Interest Allowances(1)

InterestAllowance=(Capitalbalance×6100)

Share of M:

InterestAllowance ofM}=($150,000×6100)=$9,000

Share of G:

InterestAllowance ofG}=($50,000×6100)=$6,000

Calculation of Excess Allowances

ExcessAllowance=(Totalinterest+TotalSalary+Bonus-NetIncome)

Plan (e) - (2)

ExcessAllowance=($12,000+$110,000-$115,000)

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