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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

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

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

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:

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

HATotal
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
dSalary 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

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