   Chapter 12, Problem 2PB

Chapter
Section
Textbook Problem

Dividing partnership incomeDylan 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: a. Equal division b. In the ratio of original investments c. In the ratio of time devoted to the business d. Interest of 10% on original investments and the remainder in the ratio of 3:2 e. Interest of 10% on original investments, salary allowances of $38,000 to Howell and$19,000 to Nickles, and the remainder equally. 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 InstructionsFor 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: 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 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)

InterestAllowance=(Capitalbalance×10100)

Share of H:

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