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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

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 $75,000. 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:

  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 10% on original investments and the remainder in the ratio of 3:2
  5. e. Interest of 10% on original investments, salary allowances of $38,000 to Howell and $19,000 to Nickles, and the remainder equally.
  6. f. 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 $420,000 and (2) net income of $150,000. Present the data in tabular form, using the following columnar headings:

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To determine

Determine division of net income of $420,000and $150,000under different plans.

Explanation

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.

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

 HNHN
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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