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 $164,000 for Phillip and $246,000 for Case. b. In proportion to the time devoted to the business. c. A salary allowance of $4,000 per month to Case and the balance in accordance with their initial investment ratio. d. A $4,000 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, $101,000 loss; Year 2, $151,000 profit; and Year 3, $251,000 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 answer to the nearest whole dollar.)

Plan a

:year 1  calculations share to philp share to case total plan

year 2

year 3

plan B

year 1  calculations share to philp share to case total plan

year 2

year 3

Answer 1

	WN
	Plan a & C	Percentage based on initial investment
		Philips	164000/410000*100	40%
		Case	246000/410000*100	60%
	Plan b	Percentage based on time
		Philips	.333/1.333	25%
		Case	1/1.333	75%
	Plan c & d	Salary Allowance
		Case	$4000*12	$48,000
	Plan d	Interest Allowance
		Philips	164000*10%	$16,400
		Case	246000*10%	$24,600
	Income/Loss		Calculation		Yr 1
	Sharing Plan			Philips	Case
	a
			$101000 Loss*40%	($40,400)
			$101000 Loss*60%		($60,600)
	b		$101000 Loss*25%	($25,250)
			$101000 Loss*75%		($75,750)
	c		Salary Allowance		$48,000
			($101000 loss +$48000 salary)*40%	($59,600)
			($101000 loss +$48000 salary)*60%		($89,400)
			Sub Total	($59,600)	($41,400)
	d		Salary Allowance		$48,000
			Interest Allowance	$16,400	$24,600
			($101000 loss +$48000 salary+$41000)*50%	($95,000)
			($101000 loss +$48000 salary+$41000)*50%		($95,000)
			Sub Total	($78,600)	($22,400)
	Income/Loss		Calculation		Yr 2
	Sharing Plan			Philips	Case
	a
			$151000 *40%	$60,400
			$151000 *60%		$90,600
	b		$151000 *25%	$37,750
			$151000 *75%		$113,250
	c		Salary Allowance		$48,000
			($151000 -$48000 salary)*40%	$41,200
			($151000 -$48000 salary)*60%		$61,800
			Sub Total	$41,200	$109,800
	d		Salary Allowance		$48,000
			Interest Allowance	$16,400	$24,600
			($151000 -$48000 salary-$41000)*50%	$31,000
			($151000 -$48000 salary-$41000)*50%		$31,000
			Sub Total	$47,400	$103,600
	Income/Loss		Calculation		Yr 3
	Sharing Plan			Philips	Case
	a
			$251000 *40%	$100,400
			$251000 *60%		$150,600
	b		$251000 *25%	$62,750
			$251000 *75%		$188,250
	c		Salary Allowance		$48,000
			($251000 -$48000 salary)*40%	$81,200
			($251000 -$48000 salary)*60%		$121,800
			Sub Total	$81,200	$169,800
	d		Salary Allowance		$48,000
			Interest Allowance	$16,400	$24,600
			($251000 -$48000 salary-$41000)*50%	$81,000
			($251000 -$48000 salary-$41000)*50%		$81,000
			Sub Total	$97,400	$153,600