Question

Jim, Mike, and John formed the JMJ Partnership. They agreed to share profits in a 3:1:2 ratio. However, they also agreed that each partner would receive a 5% interest on average capital balances, and they agreed to monthly salary allowances of $3,750 for Mike and $3,000 for John. Average capital balances were as follows:

Jim 300,000

Mike 240,000

John 180,000

Required:

a) Compute the net income (loss) that will be allocated to each partner assuming the partnership incurred a $27,000 net operating loss. Prepare a schedule in good form to support your answer and to report to the partnership.

b) Compute the net income (loss) that will be allocated to each partner assuming the partnership incurred a $175,000 net operating income. Prepare a schedule in good form to support your answer and to report to the partnership.

Answer 1

Part-1)

   Jim   Mike   John   Total     
Interest on average capital    15,000   12,000   9,000   36,000     
Salary allowances       3,750   3,000   6,750     
Total   15,000   15,750   12,000   42,750     
Excess allocation (-42,750-27000)   -34875   -11625   -23250   -69,750     
Net Income/loss allocation   -19,875   4,125   -11,250   -27,000     
WORKING:
Excess allocation:
Jim (69,750 * 3/6) = 34,875
Mike (69,750 * 1/6) = 11,625
John (69,750 * 2/6) = 23,250

Part-2)

   Jim   Mike   John   Total     
Interest on average capital    15,000   12,000   9,000   36,000     
Salary allowances       3,750   3,000   6,750     
Total   15,000   15,750   12,000   42,750     
Excess allocation (-42,750+175000)   66125   22041.7   44083.3   132,250     
Net Income/loss allocation   81,125   37,792   56,083   175,000     

WORKING:
Excess allocation:
Jim (132,250 * 3/6) = 66,125
Mike (132,250 * 1/6) = 22,041.7
John (132,250 * 2/6) = 44,083.3