Question

Dividing Partnership Income Morrison and Greene have decided to form a partnership. They have agreed that Morrison is to invest $246,000 and that Greene is to invest $82,000. Morrison is to devote one-half time to the business, and Greene 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 6% on original investments and the remainder equally e. Interest of 6% on original investments, salary allowances of $50,000 to Morrison and $90,000 to Greene, and the remainder equally f. Plan (e), except that Greene is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances Required: For each plan, determine the division of the net income under each of the following assumptions: (1) net income of $124,000 and (2) net income of $255,000. Round answers to the nearest whole dollar. (2) $124,000 Morrison Greene $255,000 Morrison Greene Plan

Answer 1

				$                          124,000.00			$                            255,000.00
Plan	Workings			Morrison	Greene		Morrison	Greene
a)	Equally		(1:1)	$ 62,000.00	$ 62,000.00		$ 127,500.00	$ 127,500.00
b)	Capital ratio		(3:1)	$ 93,000.00	$ 31,000.00		$ 191,250.00	$   63,750.00
c)	Time devoted		(1:2)	$ 41,333.33	$ 82,666.67		$   85,000.00	$ 170,000.00
d)	Interest Allowance			$ 14,760.00	$    4,920.00		$   14,760.00	$     4,920.00
	Balance income equally			$ 52,160.00	$ 52,160.00		$ 117,660.00	$ 117,660.00
	Net Income			$ 66,920.00	$ 57,080.00		$ 132,420.00	$ 122,580.00
e)	Interest Allowance			$ 14,760.00	$    4,920.00		$   14,760.00	$     4,920.00
	Salary allowance			$ 50,000.00	$ 90,000.00		$   50,000.00	$   90,000.00
	Excess of allowance over income			$(17,840.00)	$(17,840.00)		$   47,660.00	$   47,660.00
	Net Income			$ 46,920.00	$ 77,080.00		$ 112,420.00	$ 142,580.00
f)	Interest Allowance			$ 14,760.00	$    4,920.00		$   14,760.00	$     4,920.00
	Salary allowance			$ 50,000.00	$ 90,000.00		$   50,000.00	$   90,000.00
	Bonus	(W.N)						$   23,000.00
	Balance equally			$(17,840.00)	$(17,840.00)		$   36,160.00	$   36,160.00
	Net Income			$ 46,920.00	$ 77,080.00		$ 100,920.00	$ 154,080.00

W.N
When net income is $ 124000
Total salary allowance =			$ 50000 + $ 90000
		=	$ 140,000.00
Here, since total salary allowance exceeds net income,
no bonus shall be given
When net income is $ 255000
Total salary allowance =			$ 50000 + $ 90000
		=	$ 140,000.00
Net Income		=	$ 255,000.00
Excess of net income		=	$ 115,000.00
Bonus		=	$ 115000 x 20%
		=	$   23,000.00