1. Annual salary allowance to Nicks of $38,000.
2. Interest of 5% on each partner’s capital balance on January 1.
3. Any remaining net income divided equally.
Prado and Nicks had $20,000 and $50,000, respectively, in their January 1 capital balances.
Net income for the year was $112,000.
How much net income should be distributed to Nicks?
Answer:
Distributed to Prado and Nicks:
Prado Nicks Total
Annual salary…………………… $ 0 $38,000 $ 38,000
Interest…………………………… 1,0001 2,5002 3,500
Remaining income……………… 35,250 35,2503 70,500
Total distributed to partners… $36,250 $75,750 $112,000
1 $20,000 × 5%
2 $50,000 × 5%
3 ($112,000 – $38,000 – $3,500) × 50%
Nicks: $75,750