Larson and Alvarez have decided to form a partnership. They have agreed that Lar

Question

Larson and Alvarez have decided to form a partnership. They have agreed that Larson is to invest $150,000 and that Alvarez is to invest $50,000. Larson is to devote one-half time to the business and Alvarez is to devote full time. The following plans for the division of income are being considered:

a. Equal division.
b. In the ratio of original investments.
c. In the ratio of time devoted to the business.
d. Interest of 12% on original investments and the remainder equally.
e. Interest of 12% on original investments, salary allowances of $32,000 to Larson and $64,000 to Alvarez, and the remainder equally.
f. Plan (e), except that Alvarez is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the salary allowances.

For each plan, determine the division of the net income under each of the following assumptions: (1) net income of $105,000 and (2) net income of $180,000.

(1)
$105,000 (2)
$180,000
Plan Larson Alvarez Larson Alvarez
a $ $ $ $
b
c
d
e
f

Explanation / Answer

a) If the Net income $105,000 is divided in equal share then the Income for larson = $52,500 Income for Alvarez = $52,500 If the Net income $180,000 is divided in equal share then the Income for larson = $90,000 Income for Alvarez = $90,000 b) If the Net income $105,000 is divided in the ratio of their original investments and the two persons has decided for equal share of net income, then Ratio of their investments = $150,000 : $50,000 = 3 : 1 Therefore, the ratio of their investments is 3:1 Dividing the net income according to the ratio, Total parts are (3p + 1p = 4p) 4p = $105,000 p = $26,250 Income for Larson = 3p = 3 ($26,250) = $78,750 Income for Alvarez = 1p = $26,250 Similarly dividing the net income $180,000 in the ratio of their original investments Calculating the value of each part: 4P = $180,00 p = $45,000 Income for larson = 3p = 3 ($45,000) = $135,000 Income for Alvarez = 1p = $45,000 c) Ratio of their time devoted to business: Larson devoted one half of his time and Alvarez devoted his full time Let the full time be 12months. Then half time would be 6months. Larson : Alvarez = (6/12) : (12/12) = (1/2) : 1 = 1:2 Dividing the net income in the ratio of their time devoted to business: Total parts = 2p + 1p = 3p 3p = $105,000 p = $35,000 Therefore net income for larson and Alvarez is larson : Alvarez = $35,000 : $70,000 Similarly dividing the net income in the ratio of their time devoted to business 3p = $180,000 = $60,000 Larson : Alvarez = $60,000 : $120,000 d) Interest on original investments is 12% Interest on Larson investment = 12% ($150,000) = $18,000 Interest on Alvarez investment = 12% ($50,000) = $6,000 Total interest amount = $18,000 + $6,000 = $24,000 Deducting the interest amount from net income and dividing the remainder equally. Net income = $105,000 - $24,000 = $81,000 Equal income = $81,000 / 2 = $40,500 larson : Alvarez = $40,500 : $40,500 Net income = $180,000 - $24,000 = $156,000 Equal income = $156,000 / 2 = $78,000 Larson : Alvarez = $78,000 : $78,000 e) Along with the interest amount on the original investments, the Salary allowances of $32,000 and $64,000 are to be deducted from net income and divide the remainder equally. Net loss = $105,000 - $24,000 - $32,000 - $64,000 = ($15,000) After deducting the allowances. we arrived at net loss of $15,000. Therefore, the equal share of loss is to be done. Larson : Alvarez = ($7,500) : ($7,500) Net income = $180,000 - $24,000 - $32,000 - $64,000 = $60,000 Dividing this income equally between the two persons, we get' Larson : Alvarez = $30,000 : $30,000 f) Net income exceeds the salary allowances by $9,000 in the first case. Total salary allowances = $32,000 + $96,000 = $96,000 Net income = $105,000 Net income - Salary allowances = $105,000 - $96,000 = $9,000 Alvarez is allowed a bonus of 20% by the amount that is exceeded. Bonus = 20% ($9,000) = $1,800 Remaining amount = $9,000 - $1,800 = $7,200 Larson : Alvarez = $3,600 : $3,600 Similarly we have to calculate the bonus amount in the second case. Net income - Salary allowances = $180,000 - $96,000 = $84,000 Bonus amount = 20% ($84,000) = $16,800 Remaining amount = $84,000 - $16,800 = $67,200 Larson : Alvarez = $33,600 : $33,600 Therefore, the net income is divided equally after deducting the bonus allowance for Alvarez.

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