Irene Watts and John Lyon are forming a partnership to which Watts will devote t
ID: 2490257 • Letter: I
Question
Irene Watts and John Lyon are forming a partnership to which Watts will devote three-fourth 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 $36,000 for Watts and $54,000 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $2,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $2,000 per month to Lyon, 8% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $17,000 net loss; year 2, $42,500 net income; and year 3, $70,833 net income.
Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered. (Amounts to be deducted should be indicated with a minus sign. Do not round intermediate calculations.)
Required:Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered. (Amounts to be deducted should be indicated with a minus sign. Do not round intermediate calculations.)
Explanation / Answer
Year 3:
Year 1 Plan (a) Watts Lyon Total $ $ $ Net income (loss) (17,000) Balance allocated in proportion to initial investments (6,800) (10,200) Balance of income (loss) (17,000) Shares to partners (6,800) (10,200) 0 Plan (b) Watts Lyon Total Net income ( loss) (17,000) Balance allocated in proportion to time devoted (7,286) (9,714) Balance of income (loss) 0 Shares of the partners (7,286) (9,714) Plan (c) Net income (loss) (17,000) Salary allowances 24,000 (24,000) Balance of income (loss) (41,000) Balance allocated in proportion to initial investments (16,400) (24,600) 41,000 Balance of income (loss) 0 Shares of the partners (16,400) (600) Plan (d) Net income ( loss) (17,000) Salary allowances 24,000 (24,000) Balance of income (loss) (41,000) Interest allowances 2,880 4,320 (7,200) Balance of income (loss) (48,200) Balance allocated equally (24,100) (24,100) 48,200 Balance of income (loss) 0 Shares of the partners ( 21,220) 4,220 Year 2 Watts Lyon Total Plan ( a ) Net income (loss) 42,500 Balance allocated in proportion to initial investments 17,000 25,500 (42,500) Balance of income ( loss) 0 Shares of the partners 17,000 25,500 Plan (b) Net income ( loss) 42,500 Balance allocated in proportion to time devoted 18,214 24,286 (42,500) Balance of income (loss) 0 Shares of the partners 18,214 24,286 Plan (c) Net income (loss) 42,500 Salary allowance 24,000 (24,000) Balance of income (loss) 18,500 Balance allocated in proportion of initial investments 7,400 11,100 (18,500) Balance of income (loss) 0 Shares of the partners 7,400 35,100 Plan (d) Net income ( loss) 42,500 Salary allowance 24,000 (24,000) Balance of income (loss) 18,500 Interest allowance 2,880 4,320 (7,200) Balance of income (loss) 11,300 Balance allocated equally 5,650 5,650 (11,300) Balance of income (loss) 0 Share of the partners 8,530 33,970Related Questions
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