PROBLEMS Problem 13-1 (LO 4 Profit allocation based on various factors. Rockford

Question

PROBLEMS Problem 13-1 (LO 4 Profit allocation based on various factors. Rockford, Skeeba. and Tapinski are partners in a business which manufactures specialty railings. Their profit and loss agreement provides for the allocation of profits and losses as follows: 1. Salaries of $50,000, $40,000, and $55,000 for Rockford, Skeeba, and Tapinski, respectively. 2. Skeeba will receive a bonus equal to 5% of sales in excess of $1,000,000. 3. All partners will receive a bonus of 10% of net income in excess of $150,000 after their bonus. 4. Partners will be allocated interest on their weighted-average capital balance to the extent that it exceeds $50,000. Drawings in excess of annual salaries will be considered a reduction in capital. Interest is computed at the rate of 10%. 5. Remaining profits or losses will be allocated 35%, 25% and 40% to Rockford, Skeeba, and Tapinski, respectively

Explanation / Answer

Statement of Allocation of Income Rockford Skeeba Tapinski Total Salary to Partners $50,000 $40,000 $55,000 $145,000 Sales Bonus $0 $15,000 $0 $15,000 Bonus Paid to Partners $10,000 $10,000 $10,000 $30,000 Gain from Sale of Equipment $10,000 $0 $10,000 $20,000 Interest on Capital $3,083 $6,750 $0 $9,833 Sub-total $73,083 $71,750 $75,000 $219,833 Remaining Profit - 35% : 25% : 40% $21,058 $15,042 $24,067 $60,167 Total Income Allocated $94,141 $86,792 $99,067 $280,000 Working Note-1 : Computation of Bonus Paid to Every Partner Sales Bonus - Skeeba = ($1,300,000 - $1,000,000) X 5%=$15000 Calculation of Annual Bonus to all Partners (Income = $280,000): Bonus = 10% X (Net Income - $150,000 - Gain on sale of Equipment - Bonus) Bonus = 10% X ($280,000 - $150,000 - $20,000 - Bonus) Bonus = $11,000 - 0.10 Bonus= $10000 Bonus to Every Partner Working Note-2Computation of Interest Paid to Rock Ford Amount Invested Weights WA Amount $75,000 05/12 $31,250 $85,000 07/12 $49,583 Total Weighted Average Capital $80,833 Amt. in excess of $50,000 $30,833 Interest - 10% X $30,833 $3,083 Working Note-3 Computation of Interest Paid to Skeeba Amount Invested Weights WA Amount $125,000 06/12 $62,500 $110,000 06/12 $55,000 Total Weighted Average Capital $117,500 Amt. in excess of $50,000 $67,500 Interest - 10% X $30,833 $6,750

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