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-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 $32,000 for Watts and $48,000 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, 9% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $16,000 net loss; year 2, $40,000 net income; and year 3, $66,667 net income. 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 1   (W.N.1) Plan (a) Particulars Watts Lyon Total Net Income (Loss) -16000 Balance allocation in propotion to intial investement 0.4 -6400 0.6 -9600 Shares to Partners -6400 -9600 Plan (b) Particulars Watts Lyon Total Net Income (Loss) -16000 Balance allocation in propotion to time devoted 0.2 -3200 0.8 -12800 Shares to Partners -3200 -12800 -16000 Plan ( c ) Particulars Watts Lyon Total Net Income (Loss) -16000 Salary allowances 24000 Balance allocation on intial investments 0.4 -16000 0.6 -24000 Balance of Income/Loss -16000 0 Plan (d) Particulars Watts Lyon Total Net Income (Loss) -16000 Salary Allowances 24000 Interest on Capital 4320 Balance allocation share equally -22160 -22160 Balance of Income/Loss -22160 6160 -16000 Year 2 (W.N.1) Plan (a) Particulars Watts Lyon Total Net Income (Loss) 40000 Balance allocation in propotion to intial investement 0.4 16000 0.6 24000 Shares to Partners 16000 24000 Plan (b) Particulars Watts Lyon Total Net Income (Loss) 40000 Balance allocation in propotion to time devoted 0.2 8000 0.8 32000 Shares to Partners 8000 32000 40000 Plan ( c ) Particulars Watts Lyon Total Net Income (Loss) 40000 Salary allowances 24000 Balance allocation on intial investments 0.4 6400 0.6 9600 Balance of Income/Loss 6400 33600 40000 Plan (d) Particulars Watts Lyon Total Net Income (Loss) 40000 Salary Allowances 24000 Interest on Capital 4320 Balance allocation share equally 5840 5840 Balance of Income/Loss 5840 34160 40000 Year 3 (W.N.1) Plan (a) Particulars Watts Lyon Total Net Income (Loss) 66667 Balance allocation in propotion to intial investement 0.4 26666.8 0.6 40000.2 Shares to Partners 26666.8 40000.2 Plan (b) Particulars Watts Lyon Total Net Income (Loss) 66667 Balance allocation in propotion to time devoted 0.2 13333.4 0.8 53333.6 Shares to Partners 13333.4 53333.6 66667 Plan ( c ) Particulars Watts Lyon Total Net Income (Loss) 66667 Salary allowances 24000 Balance allocation on intial investments 0.4 17066.8 0.6 25600.2 Balance of Income/Loss 17066.8 49600.2 66667 Plan (d) Particulars Watts Lyon Total Net Income (Loss) 66667 Salary Allowances 24000 Interest on Capital 4320 Balance allocation share equally 19173.5 19173.5 Balance of Income/Loss 19173.5 47493.5 66667 W.N.1 Plan (a) Propotion based on intial investments Watt Lyonn Total Investment 32000 48000 80000 32000/80000 48000/80000 0.4 0.6 Plan (b) Propotion based on time Devoted Watt Lyon Time Devoted 0.20 0.8 Plan ( c ) Salary per month to Lyon 2000*12 $24000 Plan ( d ) Interest on Capital Investments 9% 48000*9% 4320

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