PR 12-2B Dividing partnership income

Dylan Howell and Demond Nickles have decided to form a partnership. They have agreed that Howell is to invest $50,000 and that Nickles is to invest $75,000. Howell is to devote full time to the business, and Nickles is to devote one-half 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 10% on original investments and the remainder in the ratio of 3:2.
e. Interest of 10% on original investments, salary allowances of $38,000 to Howell and $19,000 to Nickles, and the remainder equally.
f. Plan (e), except that Howell is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances.

Instructions
For each plan, determine the division of the net income under each of the following assumptions: (1) net income of $420,000 and (2) net income of $150,000. Present the data in tabular form, using the following columnar headings:



$420,000 $150,000
Plan Howell Nickles Howell Nickles





Answer:

(1) (2)
$420,000 $150,000
Plan Howell Nickles Howell Nickles
a. ………………………………………… $210,000 $210,000 $ 75,000 $75,000
b. ……………………………………… 168,000 252,000 60,000 90,000
c. ………………………………………… 280,000 140,000 100,000 50,000
d. ……………………………………… 249,500 170,500 87,500 62,500
e. ………………………………………… 218,250 201,750 83,250 66,750
f. ……………………………………… 254,550 165,450 92,550 57,450
Details:
$420,000 $150,000
Howell Nickles Howell Nickles
a. Net income (1:1)…………………… $210,000 $210,000 $ 75,000 $75,000
b. Net income (2:3)…………………… $168,000 $252,000 $ 60,000 $90,000
c. Net income (2:1)…………………… $280,000 $140,000 $100,000 $50,000
d. Interest allowance………………… $ 5,000 $ 7,500 $ 5,000 $ 7,500
Remaining income (3:2)…………… 244,500 163,000 82,500 55,000
Net income………………………… $249,500 $170,500 $ 87,500 $62,500
e. Interest allowance………………… $ 5,000 $ 7,500 $ 5,000 $ 7,500
Salary allowance…………………… 38,000 19,000 38,000 19,000
Remaining income (1:1)………… 175,250 175,250 40,250 40,250
Net income………………………… $218,250 $201,750 $ 83,250 $66,750
f. Interest allowance………………… $ 5,000 $ 7,500 $ 5,000 $ 7,500
Salary allowance…………………… 38,000 19,000 38,000 19,000
Bonus allowance………………… 72,600* 18,600 **
Remaining income (1:1)…………… 138,950 138,950 30,950 30,950
Net income………………………… $254,550 $165,450 $ 92,550 $57,450
* 20% × [$420,000 – ($38,000 + $19,000)]
** 20% × [$150,000 – ($38,000 + $19,000)]