1. Annual salary allowance to Orr of $28,000.
2. Interest of 6% on each partner’s capital balance on January 1.
3. Any remaining net income divided to Orr and Graham, 2:1.
Orr and Graham had $60,000 and $150,000, respectively, in their January 1 capital balances.
Net income for the year was $46,000.
How much net income should be distributed to Orr?
Answer:
Distributed to Orr and Graham:
Orr Graham Total
Annual salary……………………$28,000 $ 0 $28,000
Interest………………………… 3,6001 9,0002 12,600
Remaining income…………… 3,6003 1,8004 5,400
Total distributed to partners…$35,200 $10,800 $46,000
1 $60,000 × 6%
2 $150,000 × 6%
3 ($46,000 – $28,000 – $12,600) × 2/3
4 ($46,000 – $28,000 – $12,600) × 1/3
Orr: $35,200