
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
FINAN.ACCOUNTING-W/DGT ACCESS (LOOSE)
- What is the amount of shareholders equity on these financial accounting question?arrow_forwardhelparrow_forwardBudgeted overhead for Galaxy Manufacturing at the normal capacity of 40,000 direct labor hours is $7 per hour variable and $5 per hour fixed. In April, $460,000 of overhead was incurred while working 41,500 actual hours, when 42,000 standard hours were allowed. What is the overhead controllable variance?arrow_forward
- Desert Rose Electronics implemented a new returns authorization process. Returns require: inspection code (45% weighting), testing report (35% weighting), customer details (20% weighting). If a return scored 38 on inspection, 42 on testing, and 85 on customer details, your task is to identify the weighted acceptance score. Need answerarrow_forwardWhat is its profit marginarrow_forwardNeed help with this question solution general accountingarrow_forward
- Don't give me incorrect solutionarrow_forwardFor the current year ending December 31, Rutherford Manufacturing expects fixed costs of $4,200,000, a unit variable cost of $14.75, and a unit selling price of $19.25. A) Compute the anticipated break-even sales (in units). B) Compute the sales (in units) required to realize income from operations of $650,000.arrow_forwardSubject: general accountingarrow_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,

