Chapter 12, Problem 1BPSB

To determine

Concept Introduction:

Partnership: Partnership is one of the types of business origination. Under the partnership, two or more individuals agree to form a business together and share losses and profits in the predetermined ratio.

Allocation of profits: A partnership contract usually provides for the allocation of profit or losses amongst the partners. In the case of absence of allocation method, the partnership net income or losses are allocated equally amongst the partners.

To prepare: Tables for each of the three years showing allocation of partnership income under each of the four plans

Answer to Problem 1BPSB

Solution: Tables for each of the three years showing allocation of partnership income under each of the four plans are as follows:

Year-1
Allocated Net Income/ (loss)	Bell	Green	Total
Plan a	$ (14,400)	$ (21,600)	$ (36,000)
Plan b	$ (9,000)	$ (27,000)	$ (36,000)
Plan c	$ (33,600)	$ (2,400)	$ (36,000)
Plan d	$ (44,600)	$ 8,600	$ (36,000)

Year-2
Allocated Net Income/ (loss)	Bell	Green	Total
Plan a	$ 30,400	$ 45,600	$ 76,000
Plan b	$ 19,000	$ 57,000	$ 76,000
Plan c	$ 11,200	$ 64,800	$ 76,000
Plan d	$ 11,400	$ 64,600	$ 76,000

Year-3
Allocated Net Income/ (loss)	Bell	Green	Total
Plan a	$ 75,200	$ 112,800	$ 188,000
Plan b	$ 47,000	$ 141,000	$ 188,000
Plan c	$ 56,000	$ 132,000	$ 188,000
Plan d	$ 67,400	$ 120,600	$ 188,000

Explanation of Solution

Explanation: Tables for each of the three years showing allocation of partnership income under each of the four plans are prepared as follows:

Year-1
Plan a:	Bell	Green	Total
Beginning Capital investment (A)	$ 104,000	$ 156,000	$ 260,000
Ratio (B) = (A/Total)	0.40	0.60
Net Income/ (loss) for the year (C)			$ (36,000)
Allocated Net Income/ (loss) = C*B =	$ (14,400)	$ (21,600)	$ (36,000)
Plan b:	Bell	Green	Total
Time Devoted to the business (A)	0.33	1.00	1.33
Ratio (B) = (A/Total)	0.25	0.75
Net Income/ (loss) for the year (C)			$ (36,000)
Allocated Net Income/ (loss) = C*B =	$ (9,000)	$ (27,000)	$ (36,000)
Plan c:	Bell	Green	Total
Salary Allowance (A)	$ -	$ 48,000	$ 48,000
Net Income/ (loss) for the year (B)			$ (36,000)
Balance Net Income/ (loss) (C) = B-A			$ (84,000)
Beginning Capital investment (D)	$ 104,000	$ 156,000	$ 260,000
Ratio (E) = (D/Total)	0.40	0.60
Balance Allocated Net Income/ (loss) (F) = C*E =	$ (33,600)	$ (50,400)	$ (84,000)
Allocated Net Income/ (loss) =A+F =	$ (33,600)	$ (2,400)	$ (36,000)
Plan d:	Bell	Green	Total
Beginning Capital investment (A)	$ 104,000	$ 156,000	$ 260,000
Interest on beginning Capital Investment (B) = A*10%	$ 10,400	$ 15,600	$ 26,000
Salary Allowance (C)	$ -	$ 48,000	$ 48,000
Total Interest and Salary (D) = B+C =	$ 10,400	$ 63,600	$ 74,000
Total Net Income (E)			$ (36,000)
Balance Net Income (F) = (E-F) (Divided Equally)	$ (55,000)	$ (55,000)	$(110,000)
Allocated Net Income = (D+F)	$ (44,600)	$ 8,600	$ (36,000)

Year-2
Plan a:	Bell	Green	Total
Beginning Capital investment (A)	$ 104,000	$ 156,000	$ 260,000
Ratio (B) = (A/Total)	0.40	0.60
Net Income/ (loss) for the year (C)			$ 76,000
Allocated Net Income/ (loss) = C*B =	$ 30,400	$ 45,600	$ 76,000
Plan b:	Bell	Green	Total
Time Devoted to the business (A)	0.33	1.00	1.33
Ratio (B) = (A/Total)	0.25	0.75
Net Income/ (loss) for the year (C)			$ 76,000
Allocated Net Income/ (loss) = C*B =	$ 19,000	$ 57,000	$ 76,000
Plan c:	Bell	Green	Total
Salary Allowance (A)	$ -	$ 48,000	$ 48,000
Net Income/ (loss) for the year (B)			$ 76,000
Balance Net Income/ (loss) (C) = B-A			$ 28,000
Beginning Capital investment (D)	$ 104,000	$ 156,000	$ 260,000
Ratio (E) = (D/Total)	0.40	0.60
Balance Allocated Net Income/ (loss) (F) = C*E =	$ 11,200	$ 16,800	$ 28,000
Allocated Net Income/ (loss) =A+F =	$ 11,200	$ 64,800	$ 76,000
Plan d:	Bell	Green	Total
Beginning Capital investment (A)	$ 104,000	$ 156,000	$ 260,000
Interest on beginning Capital Investment (B) = A*10%	$ 10,400	$ 15,600	$ 26,000
Salary Allowance (C)	$ -	$ 48,000	$ 48,000
Total Interest and Salary (D) = B+C =	$ 10,400	$ 63,600	$ 74,000
Total Net Income (E)			$ 76,000
Balance Net Income (F) = (E-F) (Divided Equally)	$ 1,000	$ 1,000	$ 2,000
Allocated Net Income = (D+F)	$ 11,400	$ 64,600	$ 76,000

Year-3
Plan a:	Bell	Green	Total
Beginning Capital investment (A)	$ 104,000	$ 156,000	$ 260,000
Ratio (B) = (A/Total)	0.40	0.60
Net Income/ (loss) for the year (C)			$ 188,000
Allocated Net Income/ (loss) = C*B =	$ 75,200	$ 112,800	$ 188,000
Plan b:	Bell	Green	Total
Time Devoted to the business (A)	0.33	1.00	1.33
Ratio (B) = (A/Total)	0.25	0.75
Net Income/ (loss) for the year (C)			$ 188,000
Allocated Net Income/ (loss) = C*B =	$ 47,000	$ 141,000	$ 188,000
Plan c:	Bell	Green	Total
Salary Allowance (A)	$ -	$ 48,000	$ 48,000
Net Income/ (loss) for the year (B)			$ 188,000
Balance Net Income/ (loss) (C) = B-A			$ 140,000
Beginning Capital investment (D)	$ 104,000	$ 156,000	$ 260,000
Ratio (E) = (D/Total)	0.40	0.60
Balance Allocated Net Income/ (loss) (F) = C*E =	$ 56,000	$ 84,000	$ 140,000
Allocated Net Income/ (loss) =A+F =	$ 56,000	$ 132,000	$ 188,000
Plan d:	Bell	Green	Total
Beginning Capital investment (A)	$ 104,000	$ 156,000	$ 260,000
Interest on beginning Capital Investment (B) = A*10%	$ 10,400	$ 15,600	$ 26,000
Salary Allowance (C)	$ -	$ 48,000	$ 48,000
Total Interest and Salary (D) = B+C =	$ 10,400	$ 63,600	$ 74,000
Total Net Income (E)			$ 188,000
Balance Net Income (F) = (E-F) (Divided Equally)	$ 57,000	$ 57,000	$ 114,000
Allocated Net Income = (D+F)	$ 67,400	$ 120,600	$ 188,000