rene Watts and John Lyon are forming a partnership to which Watts will devote on

Question

rene Watts and John Lyon are forming a partnership to which Watts will devote one-fourth 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 $45,000 for Watts and $55,000 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $1,250 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $1,250 per month to Lyon, 9% interest on their initial capital investments and the balance shared equally. The partners expect the business to perform as follows: year 1, $15,000 net loss; year 2, $37,500 net income; and year 3, $62,500 net income

Explanation / Answer

Solution:

Division of Income Year 1 = $15000 (loss) Year 2 = $37500 Year 3 = $62500 Plan Particulars Watts Lyon Total Watts Lyon Total Watts Lyon Total a In the ratio of capital investment (45:55) -$6,750.00 -$8,250.00 -$15,000.00 $16,875.00 $20,625.00 $37,500.00 $28,125.00 $34,375.00 $62,500.00 b In the ratio of time devoted (1:4) -$3,000.00 -$12,000.00 -$15,000.00 $7,500 $30,000 $37,500.00 $12,500 $50,000 $62,500.00 c A salary allowance of $1,250 per month to lyon and remainder in the ratio of capital investment: Total Income (Loss) -$15,000.00 $37,500 62500 Salary to Lyon $15,000.00 $15,000.00 $15,000.00 $15,000.00 $15,000.00 $15,000.00 Balance of Income (Loss) -$30,000.00 $22,500.00 $47,500.00 Balance to be allocated in capital investment (45:55) -$13,500.00 -$16,500.00 $10,125.00 $12,375.00 $21,375.00 $26,125.00 Total Share of Income -$13,500 -$1,500 -$15,000 $10,125 $27,375 $37,500 $21,375 $41,125 $62,500 d A salary allowance of $1,250 per month to lyon, 9% interest on capital investment and remainder to be shared equally: Total Income (Loss) -$15,000.00 $37,500 62500 Salary to Lyon $15,000.00 $15,000.00 $15,000.00 $15,000.00 $15,000.00 $15,000.00 Balance of Income (Loss) -$30,000.00 $22,500.00 $47,500.00 Interest on capital $4,050.00 $4,950.00 $9,000.00 $4,050.00 $4,950.00 $9,000.00 $4,050.00 $4,950.00 $9,000.00 Balance of Income (Loss) -$39,000.00 $13,500.00 $38,500.00 Balance to be allocated equally -$19,500.00 -$19,500.00 $6,750.00 $6,750.00 $19,250.00 $19,250.00 Total Share of Income -$15,450.00 $450.00 -$15,000.00 $10,800.00 $26,700.00 $37,500.00 $23,300.00 $39,200.00 $62,500.00

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