Irene Watts and John Lyon are forming a partnership to which Watts will devote o
ID: 2328186 • Letter: I
Question
Irene Watts and John Lyon are forming a partnership to which Watts will devote one-half time and Lyon will devote full time. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments, which they have agreed will be $31,500 for Watts and $38,500 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $2,250 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $2,250 per month to Lyon, 11% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $18,000 net loss; year 2, $45,000 net income; and year 3, $75,000 net income.
Explanation / Answer
75,000
Year 1 Plan A Watts Lyon Total Net Income /(Loss) (18,000) Balance allocated in proportion to initial investment 18,000*(31,500/70,000) (8,100) 18,000*(38,500/70,000) (9,900) 18,000 Balance of income / (loss) nil Share to the Partners (8,100) (9,900) (18,000) Plan B Watts Lyon Total Net Income/(Loss) (18,000) Balance allocated in proportion to time devoted 18,000*(0.5/1.5) (6,000) 18,000*(1/1.5) (12,000) 18,000 Balance of income / (loss) nil Share to the Partners (6,000) (12,000) (18,000) Plan C Watts Lyon Total Net Income/ (Loss) (18,000) Salary allowances 2,250*12 27,000 (27,000) Balance of income/ (Loss) (45,000) Balance allocated in proportion of initial investment 45,000*(31,500/70,000) (20,250) 45,000*(38,500/70,000) (24,750) 45,000 Balance of Income/ (Loss) nil Share of the Partners (Salary + Balance Allocated) (20,250) 2,250 (18,000) Plan D Watts Lyon Total Net Income/ (Loss) (18,000) Salary Allowance 2,250*12 27,000 (27,000) Balance of income/ (Loss) (45,000) Interest Allowances 31,500*11% 3,465 38,500*11% 4,235 (7,700) Balance of income/(Loss) (52,700) Balance allocated Equally 52,700/2 (26,350) 52,700/2 (26,350) 52,700 Balance of Income/(Loss) nil Share of the partners (Salary+Interest+Balance allocated) (22,885) 4,885 (18,000)Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.