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Irene Watts and John Lyon are forming a partnership to which Watts will devote one-half time...

Irene Watts and John Lyon are forming a partnership to which Watts will devote one-half time and Lyon will devote full time. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments, which they have agreed will be $40,000 for Watts and $60,000 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $1,750 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $1,750 per month to Lyon, 12% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $18,000 net loss; year 2, $45,000 net income; and year 3, $75,000 net income.

Required:
Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered. (Enter all allowances as positive values. Enter losses as negative values. Do not round intermediate calculations. Round final answer to the nearest whole dollar.)

Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered.
Year 1
Plan (a) Watts Lyon Total
Net Income (loss) $(18,000)
Balance allocated in proportion to initial investments
Balance of income (loss)
Shares to the partners
Plan (b) Watts Lyon Total
Net Income (loss) $(18,000)
Balance allocated in proportion to time devoted
Balance of income (loss)
Shares to the partners
Plan (c) Watts Lyon Total
Net Income (loss) $(18,000)
Salary allowances
Balance of income (loss)
Balance allocated in proportion to initial investments
Balance of income (loss)
Shares of the partners
Plan (d) Watts Lyon Total
Net Income (loss) $(18,000)
Salary allowances
Balance of income (loss)
Interest allowances
Balance of income (loss)
Balance allocated equally
Balance of income (loss)
Shares of the partners

Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered.
Year 2
Plan (a) Watts Lyon Total
Net Income (loss) $45,000
Balance allocated in proportion to initial investments
Balance of income (loss)
Shares to the partners
Plan (b) Watts Lyon Total
Net Income (loss) $45,000
Balance allocated in proportion to time devoted
Balance of income (loss)
Shares to the partners
Plan (c) Watts Lyon Total
Net Income (loss) $45,000
Salary allowances
Balance of income (loss)
Balance allocated in proportion to initial investments
Balance of income (loss)
Shares of the partners
Plan (d) Watts Lyon Total
Net Income (loss) $45,000
Salary allowances
Balance of income (loss)
Interest allowances
Balance of income (loss)
Balance allocated equally
Balance of income (loss)
Shares of the partners

Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered.
Year 3
Plan (a) Watts Lyon Total
Net Income (loss) $75,000
Balance allocated in proportion to initial investments
Balance of income (loss)
Shares to the partners
Plan (b) Watts Lyon Total
Net Income (loss) $75,000
Balance allocated in proportion to time devoted
Balance of income (loss)
Shares to the partners
Plan (c) Watts Lyon Total
Net Income (loss) $75,000
Salary allowances
Balance of income (loss)
Balance allocated in proportion to initial investments
Balance of income (loss)
Shares of the partners
Plan (d) Watts Lyon Total
Net Income (loss) $75,000
Salary allowances
Balance of income (loss)
Interest allowances
Balance of income (loss)
Balance allocated equally
Balance of income (loss)
Shares of the partners

Solutions

Expert Solution

Year 1
Plan (a) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)     (18,000.00)
Balance allocated in propotion to intial Investments ($18,000) X 40%     (7,200.00) ($18,000) X 60% (10,800.00)     (18,000.00)
Balance of Income (Loss)                       -  
Shares to partners     (7,200.00) (10,800.00)
Plan (b) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)     (18,000.00)
Balance allocated in propotion of time devoted ($18,000) X 33.33%     (6,000.00) ($18,000) X 66.67% (12,000.00)     (18,000.00)
Balance of Income (Loss)                       -  
Shares to partners     (6,000.00) (12,000.00)
Plan (c) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)     (18,000.00)
Salary Allowance                     -   $1,750 X 12     21,000.00        21,000.00
Balance of Income (Loss)     (39,000.00)
Balance allocated in propotion to intial Investments ($39,000) X 40% (15,600.00) ($39,000) X 60% (23,400.00)     (39,000.00)
Balance of Income (Loss)                       -  
Shares to partners (15,600.00)     (2,400.00)
Plan (d) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)     (18,000.00)
Salary Allowance                     -   $1,750 X 12     21,000.00        21,000.00
Balance of Income (Loss)     (39,000.00)
Interest Allowance $40,000 X 12%        4,800.00 $60,000 X 12%        7,200.00        12,000.00
Balance of Income (Loss)     (51,000.00)
Balance allocated equally ($51,000) X 50% (25,500.00) ($51,000) X 50% (25,500.00)     (51,000.00)
Balance of Income (Loss)        12,000.00
Shares to partners (20,700.00)        2,700.00
Year 2
Plan (a) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)        45,000.00
Balance allocated in propotion to intial Investments $45,000 X 40%     18,000.00 $45,000 X 60%     27,000.00        45,000.00
Balance of Income (Loss)                       -  
Shares to partners     18,000.00     27,000.00
Plan (b) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)        45,000.00
Balance allocated in propotion of time devoted $45,000 X 33.33%     15,000.00 $45,000 X 66.67%     30,000.00        45,000.00
Balance of Income (Loss)                       -  
Shares to partners     15,000.00     30,000.00
Plan (c) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)        45,000.00
Salary Allowance                     -   $1,750 X 12     21,000.00        21,000.00
Balance of Income (Loss)        24,000.00
Balance allocated in propotion to intial Investments $24,000 X 40%        9,600.00 $24,000 X 60%     14,400.00        24,000.00
Balance of Income (Loss)                       -  
Shares to partners        9,600.00     35,400.00
Plan (d) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)        45,000.00
Salary Allowance                     -   $1,750 X 12     21,000.00        21,000.00
Balance of Income (Loss)        24,000.00
Interest Allowance $40,000 X 12%        4,800.00 $60,000 X 12%        7,200.00        12,000.00
Balance of Income (Loss)        12,000.00
Balance allocated equally $12,000 X 50%        6,000.00 $12,000 X 50%        6,000.00        12,000.00
Balance of Income (Loss)        12,000.00
Shares to partners     10,800.00     34,200.00
Year 3
Plan (a) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)        75,000.00
Balance allocated in propotion to intial Investments $75,000 X 40%     30,000.00 $75,000 X 60%     45,000.00        75,000.00
Balance of Income (Loss)                       -  
Shares to partners     30,000.00     45,000.00
Plan (b) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)        75,000.00
Balance allocated in propotion of time devoted $75,000 X 33.33%     25,000.00 $75,000 X 66.67%     50,000.00        75,000.00
Balance of Income (Loss)                       -  
Shares to partners     25,000.00     50,000.00
Plan (c) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)        75,000.00
Salary Allowance                     -   $1,750 X 12     21,000.00        21,000.00
Balance of Income (Loss)        54,000.00
Balance allocated in propotion to intial Investments $54,000 X 40%     21,600.00 $54,000 X 60%     32,400.00        54,000.00
Balance of Income (Loss)                       -  
Shares to partners     21,600.00     53,400.00
Plan (d) Watts Lyon Total
Calculations Amt. Calculations Amt.
Net Income (Loss)        75,000.00
Salary Allowance                     -   $1,750 X 12     21,000.00        21,000.00
Balance of Income (Loss)        54,000.00
Interest Allowance $40,000 X 12%        4,800.00 $60,000 X 12%        7,200.00        12,000.00
Balance of Income (Loss)        42,000.00
Balance allocated equally $42,000 X 50%     21,000.00 $42,000 X 50%     21,000.00        42,000.00
Balance of Income (Loss)        12,000.00
Shares to partners     25,800.00     49,200.00

ekkarill92 answered 2 years ago
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