Question

Dividing Partnership Income Morrison and Greene have decided to form a partnership. They have agreed that Morrison is to invest $204,000 and that Greene is to invest $68,000. Morrison is to devote one-half time to the business, and Greene is to devote full time. The following plans for the division of income are being considered: Equal division. In the ratio of original investments. In the ratio of time devoted to the business. Interest of 5% on original investments and the remainder equally Interest of 5% on original investments, salary allowances of $40,000 to Morrison and $80,000 to Greene, and the remainder equally Plan (e), except that Greene is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances Required: For each plan, determine the division of the net income under each of the following assumptions: (1) net income of $118,000 and (2) net income of $210,000. Round answers to the nearest whole dollar.

Answer 1

Plan (a) Equal division

Case 1. Income = $ 118000 Morrison's share= $118000/2 = $59000 Greene's Share =$ 118000/2 = 59000

Case 2 Income = $210000 Morrison's share = $210000/2 = $105000 Greene's Share= $ 210000/2=105000

Plan (b) In the ratio of original investments

Case 1 Income = $ 118000 Morrison's share= $118000*204000/272000=88500 Greene's Share=$118000*68000/272000=29500

Case 2 Income= $ 210000 Morrison's share= $210000*204000/272000=157500

Greene's Share=210000*68000/272000=52500

Plan (c) In the ratio of time devoted to business

Case 1 Income = $118000 Morrison's share =$118000/3= $39333 Greene's Share = $118000*2/3 = $ 78667

Case 2 Inome = $ 210000 Morrison's share = $210000/3= $70000 Greene's Share = $ 210000*2/3 = $ 140000

Plan (d)

Case 1 Income = $ 118000 Morrison Greene

Interest on Investment 10200 3400

Share in income   52200 52200

Total 62400 55600

Case 2 Income = $210000 Morrison Greene

Interest on Investment 10200 3400

Share in income 98200 98200

Total 108400 101600

Plan (e)

Case 1 Income = $ 118000 Morrison Greene

Interest on Investment 10200 3400

Salary 40000 80000

Share in loss (7800) (7800)

Total 42400   75600

Case 2 Income = $210000 Morrison Greene

Interest on Investment 10200 3400

Salary 40000 80000

Share in income 38200 38200

Total 88400 121600

Plan (f)

Case 1 Income = $ 118000 Morrison Greene(Note no bonus shall be provided as net income does not exceed salary allownaces)

Interest on Investment 10200 3400

Salary 40000 80000

Share in loss (7800) (7800)

Total 42400   75600

Case 2 Income = $210000 Morrison Greene

Interest on Investment 10200 3400

Salary 40000 80000

Bonus 0 4500

Share in income 35950 35950

Total 86150 123850

Total 88400 121600