Question

Big red partnership had a net income of $300,000 for the year ending in 12/31/2016. Big red and Little red are the two partners. Please allocate the net income as follows:

1. Due to Little red’s hard work they received a bonus of 25% after the deductions
2. Each received 6% of their average capital balance.

Big Red’s beginning capital balance	$100,000
July 1st Big red invested	$50,000
Little red’s beginning capital balance	$500,000
November 1st Little red withdrew	$100,000

Big red received salary of $60,000

Little red received salary of $120,000

Any remainder to be divided equally.

Big red’s share of net income?

Little red’s share of net income?

Answer 1

                                                       Big red partnership

Schedule showing the Distribution of income for the year ending 12/31/2016

	Big Red	Little Red	Total
Salary	$60,000	$120,000	$180,000
Interest Allowance (Average capital balance*rate of Interest);
Big Red = $125,000 (See calculation) *6%	$7500
Little Red= $450,000 (See calculation) *6%		$27000
Interest Allowance, Total	_______	______	$34,500
Total salaries and Interest	$67,500	$147,000	$214,500
Remaining Deficiency $85,500                                                                           (Net Income of $30,000 - Total salaries and Interest Of $214,500);
Big Red = $85,500 *50%	$42750
Little Red = $85,500 *50%		$42750
Remaining Deficiency, Total	________	_________	$85,500
Total Division of Net Income	$110,250	$189,750	$300,000

Big red’s share of net income is $110,250

Little red’s share of net income $189,750

1.Calculation of average capital balance

Average capital balance = Opening Balance + Closing Balance / 2

For Big Red;

Average capital balance = $100,000 + (Opening Balance + Additional Investment) / 2

                                            = $100,000 + ($100,000 + $50000) /2

                                           = $125,000

For Little Red;

Average capital balance = $100,000 + (Opening Balance -Drawings) / 2

                                            = $500,000 + ($500,000 - $100000) /2

                                           = $450,000

Note 1: Due to Little red’s hard work they received a bonus of 25% after the deductions, this Bonus does not include in the Distribution of Income of Partnership. Distribution of Income of Partnership will take only salary and interest allowance of partners.

Note 2: Here, Partnership has a Remaining Income of $85,500 after distributing Salary and Interest allowance. Because, “Net Income” of $3,00,000 is more than “Total Salary and Interest allowance” of $214,500. Little red and Big red will share this Income of $85,500 equally.