Rex Baker and Ty Farney are forming a partnership to which Baker will devote one

Question

Rex Baker and Ty Farney are forming a partnership to which Baker will devote one half time and Farney will devote full time. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investment, which they have agreed will be $21,000 for Baker and $31,500 for Farney;(b) in proportion to the time devoted to the business; (c) a salary allowance of $3,000 per month to Farney, and the balance in accordance with the ratio of their initial capital investment; or (d) a salary allowance of $3,000 per month to Farney, 10% interest on their inital capital investment. and the balance shared equally. The partners expect the business to perform as follows, year 1, 18,000net loss year 2 45,000 net income and year 3 75,000 net income. Complete the tables one for the first 3 years, by showing how to allocate partnership income or loss to the partners

Explanation / Answer

EXPLANATIONS / ASSUMPTIONS: a) The ratio of investments by Baker(B) and Farney(F) = B :21000 : 40% F: 31500: 60% b) As per proportion of their devoted time B is entitled to 1/3 and F is 2/3 c) Salary allowance of $3000 per month to F works out to $36,000 charge every year on net income/loss of the Firm and income to F d) 10% interest charge on investment of B & F works out to $5,250 charge on net income/loss of the Firm every year and income of $2100 to B and $3150 to F. e) Figure shown in brackets is Loss. f) Please note *(___) and **(___) are explanations for the above mentioned figures --------------------------------------------------------------------------------------------------- PLAN-------------YEAR 1 -----------------------YEAR 2---------------------------YEAR 3------- ($18,000) $45,000 $75,000 ----------------------------------------------------------------------------------------------------- a) Baker ($7,200) $18,000 $30,000 Farney ($10,800) $27,000 $45,000 ----------------------------------------------------------------------------------------------------- b) Baker ($6,000) $15,000 $25,000 Farney ($12,000) $30,000 $50,000 ----------------------------------------------------------------------------------------------------- c) Baker ($21,600) $3,600 $15,600 Farney * $3,600 *$41,400 *$59,400 *(36,000-32,400 ) *(36,000+5,400) *(36,000+23,400) ------------------------------------------------------------------------------------------------------- d) Baker * ($27,525) *$3,975 *$18,975 *(2,100-29,625) *(2,100+1,875) *(2,100+16,875) Farney **$9,525 **$41,025 **$56,025 **(36,000+3,150-29,625) **(36,000+3,150+1,875) **(36,000+3,150+16,875) Please note *(___) and **(___) are explanations for the above mentioned figures

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