Chapter 12, Problem 12.2BPR

To determine

Partnership

It is that form of organization which is owned and managed by two or more persons who invest and share the profits and losses according to a pre-determined ratio.

To determine: The division of net income of $420,000and $150,000under different plans.

Answer to Problem 12.2BPR

The division of net income of $420,000and $150,000under different plans is as follows:

	Net Income  $4,20,000		Net Income  $1,50,000
Plan	H	N	H	N
a. Equal division	$210,000	$210,000	$75,000	$75,000
b. In the ratio of original investment	$168,000	$252,000	$60,000	$90,000
c. In the ratio of time devoted to the business	$280,000	$140,000	$100,000	$50,000
d. Interest of 10% on original investments and remainder in the ratio of 3:2	$249,500	$170,500	$87,500	$62,500
e. Interest of 10% on original investments, salary allowances of $38,000 to H and $19,000 to N, and the remainder equally	$218,250	$201,750	$83,250	$66,750
f. Plan (e) except that H is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances.	$254,550	$165,450	$92,550	$57,450

Table (1)

Explanation of Solution

Working Notes for determining the division of net income between partner H and N under different plans:

	Net Income  $4,20,000		Net Income  $1,50,000
	H	N	H	N
Plan (a)
Income sharing ratio under this plan is equal. So, the ratio is 1:1
Distribution of Net Income (1:1)	$210,000	$210,000	$75,000	$75,000
Plan (b)
Income sharing ratio under this plan is the ratio of original investment by H and N i.e. $50,000 & $75,000 respectively. So, the ratio is 2:3
Distribution of Net Income (2:3)	$168,000	$252,000	$60,000	$90,000
Plan (c)
Income sharing ratio under this plan is the ratio of time devoted by H and N i.e. full time & 1/2 time respectively. So, the ratio is 2:1
Distribution of Net Income (2:1)	$280,000	$140,000	$100,000	$50,000
Plan (d)
Interest allowance (1)	$5,000	$7,500	$5,000	$7,500
Income sharing ratio under this plan is 3:2. Any income left after allowing interest on capital will be distributed in 3:2 ratio.
Remaining Income (3:2)	$244,500	$163,000	$82,500	$55,000
Net Income	$249,500	$170,500	$87,500	$62,500
Plan (e)
Interest allowance (1)	$5,000	$7,500	$5,000	$7,500
Salary allowance	$38,000	$19,000	$38,000	$19,000
Any excess income left after deducting interest and salary allowance will be distributed among partners equally. So, the income or loss sharing ratio is 1:1
Remaining Income (1:1)	$175,250	$175,250	$40,250	$40,250
Net Income	$218,250	$201,750	$83,250	$66,750
Plan (f)
Interest allowance (1)	$5,000	$7,500	$5,000	$7,500
Salary allowance	$38,000	$19,000	$38,000	$19,000
Bonus allowance (2)	$72,600		$18,600
Any excess income left after deducting interest, bonus and salary allowance will be distributed among partners equally. So, the income or loss sharing ratio is 1:1
Remaining Income (1:1)	$138,950	$138,950	$30,950	$30,950
Net Income	$254,550	$165,450	$92,550	$57,450

Table (2)

Calculation of Interest Allowances – (1)

$\text{Interest}\text{Allowance}\text{=}\left(\text{Capital}\text{balance}\text{×}\frac{10}{\text{100}}\right)$

Share of H:

$\begin{array}{c}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\begin{array}{l}\text{Interest}\\ \text{Allowance of}\text{}\text{H}\end{array}\}\text{=}\left(\text{\$50,000}\text{×}\frac{\text{10}}{\text{100}}\right)\\ \text{=}\text{\$5,000}\end{array}$

Share of N:

$\begin{array}{c}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\begin{array}{l}\text{Interest}\\ \text{Allowance of}\text{}\text{N}\end{array}\}\text{=}\left(\text{\$750,000}\text{×}\frac{\text{10}}{\text{100}}\right)\\ \text{=}\text{\$7,500}\end{array}$

Calculation of Bonus Allowances (2)

$\text{Bonus}\text{Allowance}\text{=}\left(\begin{array}{l}\text{Net}\text{Income}\text{-}\\ \text{Salary}\text{Allowance}\end{array}\right)\text{×}\frac{\text{20}}{\text{100}}$

When Net income = $420,000

$\begin{array}{c}\text{Bonus}\text{Allowance}\text{=}\left[\begin{array}{l}\text{\$420,000}\text{-}\\ \left(\text{\$38,000}\text{+}\text{\$19,000}\right)\end{array}\right]\text{×}\frac{\text{20}}{\text{100}}\\ \text{=\$72,600}\end{array}$

When Net income = $150,000

$\begin{array}{c}\text{Bonus}\text{Allowance}\text{=}\left[\begin{array}{l}\text{\$150,000}\text{-}\\ \left(\text{\$38,000}\text{+}\text{\$19,000}\right)\end{array}\right]\text{×}\frac{\text{20}}{\text{100}}\\ \text{=\$18,600}\end{array}$