Irene Watts and John Lyon are forming a partnership to which Watts will devote o

Question

Irene Watts and John Lyon are forming a partnership to which Watts will devote one-half time and Lyon will devote full time. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments, which they have agreed will be $31,500 for Watts and $38,500 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $2,250 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $2,250 per month to Lyon, 11% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $18,000 net loss; year 2, $45,000 net income; and year 3, $75,000 net income.

Explanation / Answer

Income (Loss) Year 1 Sharing Plan Calculations Watts Lyon (a) 45% x 18000 loss -8100 55% x 18000 loss -9000 (b) 33 1/3% x 18000 loss   -6000 66 2/3% x 18000 loss   -12000 (c) Salary allowance 27000 45% x (18000 loss + 27000 salary) -20250 55% x (18,000 loss + 27,000 salary) ________ -24,750 Totals -20250 2,250 (d) Salary allowance 27000 Interest allowances 3465 4,235 50% x (18000 loss + 27000 Salary + 7700 Interest) -26350 -26350 Totals -22,885 4,885 Income (Loss) Year 2 Sharing Plan Calculations Watts Lyon (a) 45% x 45000 20250 55% x 45000 24750 (b) 33 1/3% x 45000 15000 66 2/3% x 45000 30000 (c) Salary allowance 27000 45% x (45000 - 27000 salary) 8100 55% x (45,000 - 27,000 salary) ________ 9,900 Totals 8100 36,900 (d) Salary allowance 27000 Interest allowances 3465 4,235 50% x (45000 - 27000 Salary - 7700 Interest) 5150 5150 Totals 8,615 36,385 Income (Loss) Year3 Sharing Plan Calculations Watts Lyon (a) 45% x 75000 33750 55% x 75000 41250 (b) 33 1/3% x 75000 25000 66 2/3% x 75000 50000 (c) Salary allowance 27000 45% x (75000 - 27000 salary) 21600 55% x (75,000 - 27,000 salary) ________ 26,400 Totals 21600 53,400 (d) Salary allowance 27000 Interest allowances 3465 4,235 50% x (75000 - 27000 Salary - 7700 Interest) 20150 20150 Totals 23,615 51,385

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.