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
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