Question

Phillip and Case are in the process of forming a partnership to Import Belgian chocolates, to which Phillip will contribute one-third time and Case full time. They have discussed the following alternative plans for sharing profit and losses. a. In the ratio of their Initial Investments, which they have agreed will be $156,000 for Phillip and $364,000 for Case. b. In proportion to the time devoted to the business. c. A salary allowance of $7,000 per month to Case and the balance in accordance with their initial Investment ratio. d. A $7,000 per month salary allowance to Case, 10% Interest on their initial Investments, and the balance equally. The partners expect the business to generate profit as follows: Year 1, $112,000 loss; Year 2, S162,000 profit, and Year 3, $262,000 profit. Required: Complete a schedule for each of the four plans being considered by showing how the partnership profit or loss for each year would be allocated to the partners. (Enter all amounts as positive value. Round the final answers to the nearest whole dollar.) Plan a: Year Calculations Share to Phillip Share to Case Total 1 S 2 s 3 S 0 Plan b: Year Calculations Share to Phillip Share to Case Total 1 S 2 S OOO 3 S

Answer 1

Part (a) (156,000 : 364,000) = (3:7)

Year	Calculations	Share to Philip	Share to Case	Total
1	Loss of 112,000 in (3:7)	(33,600)	(78,400)	(112,000)
2	Profit of 162,000 in 3:7)	48,600	113,400	162,000
3	Profit of 262,000 in (3:7)	78,600	183,400	262,000

Part (b) (one-third : full-time) = (1:3)

Year	Calculations	Share to Philip	Share to Case	Total
1	Loss of 112,000 in (1:3)	(28,000)	(84,000)	(112,000)
2	Profit of 162,000 in (1:3)	40,500	121,500	162,000
3	Profit of 262,000 in (1:3)	65,500	196,500	262,000

Part (c) 156,000 : 364,000 = 3:7

Year	Calculations	Share to Philip	Share to Case	Total
1	Loss			(112,000)
	Salary Allowance	84,000	84,000	(168,000)
	Balance			(280,000)
	Remainder (3:7)	(84,000)	(196,000)	280,000
	Balance			0
	Share to Each Partner	0	(112,000)	(112,000)
2	Profit			162,000
	Salary Allowance	84,000	84,000	(168,000)
	Balance			(6,000)
	Remainder (3:7)	(1,800)	(4,200)	6,000
	Balance			0
	Share to Each Partner	82,200	79,800	162,000
3	Profit			262,000
	Salary Allowance	84,000	84,000	(168,000)
	Balance			94,000
	Remainder (3:7)	28,200	65,800	(94,000)
	Balance			0
	Share to Each Partner	112,200	149,800	262,000

Part (d) (1:1)

Year	Calculations	Share to Philip	Share to Case	Total
1	Loss			(112,000)
	Salary Allowance	84,000	84,000	(168,000)
	Interest Allowance	15,600	36,400	(52,000)
	Total Salaries and Interest			(220,000)
	Balance			332,000
	Remainder (1:1)	(166,000)	(166,000)	332,000
	Balance			0
	Share to Each Partner	(66,400)	(45,600)	(112,000)
2	Profit			162,000
	Salary Allowance	84,000	84,000	(168,000)
	Interest Allowance	15,600	36,400	(52,000)
	Total Salaries and Interest			(220,000)
	Balance			(58,000)
	Remainder (1:1)	(29,000)	(29,000)	6,000
	Balance			0
	Share to Each Partner	70,600	91,400	162,000
3	Profit			262,000
	Salary Allowance	84,000	84,000	(168,000)
	Interest Allowance	15,600	36,400	(52,000)
	Total Salaries and Interest			(220,000)
	Balance			42,000
	Remainder (1:1)	21,000	21,000	(94,000)
	Balance			0
	Share to Each Partner	120,600	141,400	262,000