
Determine division of net income of $115,000 and $200,000 under different plans.

Answer to Problem 2PA
The division of net income of $115,000 and $200,000 under different plans is as follows:
Net Income $1,15,000 |
Net Income $2,00,000 | ||||
Plans | M | G | M | G | |
a | Equal division | $57,500 | $57,500 | $100,000 | $100,000 |
b | In the ratio of original investment | $86,250 | $28,750 | $150,000 | $50,000 |
c | In the ratio of time devoted to the business | $38,333 | $76,667 | $66,667 | $133,333 |
d | Interest of 6% on original investments and remainder equally | $60,500 | $54,500 | $103,000 | $97,000 |
e | Interest of 6% on original investments, salary allowances of $40,000 to M and $70,000 to G, and the remainder equally | $45,500 | $69,500 | $88,000 | $112,000 |
f | Plan (e) except that G is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances. | $45,000 | $70,000 | $79,000 | $121,000 |
Table (1)
Explanation of Solution
Working Notes for determining the division of net income between partner M and G under different plans:
Net Income $1,15,000 |
Net Income $2,00,000 | |||
M | G | M | G | |
Plan (a) | ||||
Income sharing ratio under this plan is equal. So, the ratio is 1:1 | ||||
Distribution of Net Income (1:1) | $57,500 | $57,500 | $100,000 | $100,000 |
Plan (b) | ||||
Income sharing ratio under this plan is the ratio of original investment by M and G i.e. $1, 50,000 & $50,000 respectively. So, the ratio is 3:1 | ||||
Distribution of Net Income (3:1) | $86,250 | $28,750 | $150,000 | $50,000 |
Plan (c) | ||||
Income sharing ratio under this plan is the ratio of time devoted by M and G i.e. 1/2 time & full time respectively. So, the ratio is 1:2 | ||||
Distribution of Net Income (1:2) | $38,333 | $76,667 | $66,667 | $133,333 |
Plan (d) | ||||
Interest allowance (1) | $9,000 | $3,000 | $9,000 | $3,000 |
Income sharing ratio under this plan is equal. Any income left after allowing interest on capital will be distributed equally. So, the income sharing ratio is 1:1 | ||||
Remaining Income (1:1) | $51,500 | $51,500 | $94,000 | $94,000 |
Net Income | $60,500 | $54,500 | $103,000 | $97,000 |
Plan (e) | ||||
Interest allowance (1) | $9,000 | $3,000 | $9,000 | $3,000 |
Salary allowance | $40,000 | $70,000 | $40,000 | $70,000 |
Any excess income or loss left after deducting interest and salary allowance will distributed among partners equally. So, the income or loss sharing ratio is 1:1 | ||||
Excess allowance over income (1:1) (2) | -$3,500 | -$3,500 | ||
Remaining Income (1:1) | $39,000 | $39,000 | ||
Net Income | $45,500 | $69,500 | $88,000 | $112,000 |
Plan (f) | ||||
Interest allowance (1) | $9,000 | $3,000 | $9,000 | $3,000 |
Salary allowance | $40,000 | $70,000 | $40,000 | $70,000 |
Bonus allowance (4) | $1,000 | $18,000 | ||
Any excess income or loss left after deducting interest and salary allowance will distributed among partners equally. So, the income or loss sharing ratio is 1:1 | ||||
Excess allowance over income (1:1) (3) | -$4,000 | -$4,000 | ||
Remaining Income (1:1) | $30,000 | $30,000 | ||
Net Income | $45,000 | $70,000 | $79,000 | $121,000 |
Table (2)
Calculation of Interest Allowances – (1)
Share of M:
Share of G:
Calculation of Excess Allowances –
Plan (e) - (2)
Profit sharing ratio of M and G = 1:1
Share of M:
Share of G:
Plan (f) - (3)
Profit sharing ratio of M and G = 1:1
Share of M:
Share of G:
Calculation of Bonus Allowances (4)
When Net income = $115,000
When Net income = $200,000
Want to see more full solutions like this?
Chapter 12 Solutions
Cengagenowv2, 1 Term Printed Access Card For Warren/reeve/duchac's Financial Accounting, 15th
- Can you explain this general accounting question using accurate calculate methods ?arrow_forwardA cost is $5,600 at 1,000 units, $9,000 at 2,000 units, and $10,200 at 3,100 units. This cost is a __. A. step cost. B. fixed cost. C. mixed cost D. variable cost.arrow_forwardManagement anticipates fixed costs of $65,000 and variable costs equal to 35% of sales. What will pretax income equal if sales are $320,000? Help mearrow_forward
- Diane Fabrics has a magnitude of operating leverage of 2 at a sales level of $320,000. If sales increase by 10%, profits (net income) will increase by__. a. 5% b. 10% c. 15% d. 20% 4 POINTSarrow_forwardTutor please provide answerarrow_forwardYou are an accounts payable clerk for a small manufacturer that creates designer flowerpots. You received three scenarios with specific dates. Answer the following questions. (a1) Scenario 1: • Copy of vendor invoice #201 for $10,000 received on February 15 showing terms of net 2/10 • Payment voucher with the vendor name, the amount due, and terms with management approval • Copy of the remittance advice sent to the vendor showing #201 included in the payment to the vendor on February 24 1. Would you enter accounting transactions? Yes 2. If so, what accounting entries would you make? (Credit account titles are automatically indented when the amount is entered. Do not indent manually. List all debit entries before credit entries. If no entry is required, select "No Entry" for the account titles and enter O for the amount in the relevant debit OR credit box. Entering zero in ALL boxes will result in the question being marked incorrect.) Date Account Titles and Explanation > > > Debit…arrow_forward
- Subject: financial accountingarrow_forwardPlease provide correct answer of this general accounting question please solvearrow_forwardOn January 1, 2025, Willow Tech Inc. reported a Salaries Payable balance of $39,000. Salaries Expense for 2025 totaled $512,000. The ending balance of Salaries Payable on December 31, 2025, was $46,000. What is the amount of cash paid for salaries in 2025?arrow_forward
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,

