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 $42,000 for Watts and $63,000 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $6,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $6,000 per month to Lyon, 10% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $36,000 net loss; year 2, $90,000 net income; and year 3, $150,000 net income.

Explanation / Answer

1 year =$ (36,000)

c)a salary allowance of $6,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments= total loss = (72000+36000)

2 year =$ 90,000

c)a salary allowance of $6,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments= total loss = (90000-72000)=18000

3 year =$ 150000

c)a salary allowance of $6,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments= total loss = (150000-72000)=78000

1

income or loss sharing plan ratio of sharing plans irene wats john lyon a)ratio of initial capital investments 2:3 (14400) (21600) b)based on time 1:2 (12000) (24000)

c)a salary allowance of $6,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments= total loss = (72000+36000)

2:3 (43,200) (64,800) d)a salary allowance of $6,000 per month to Lyon, 10% interest on their initial capital investments, and the balance shared equally=(72000+36000+10500) 1:1 (59,250) (59,250)

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