Question

Morrison and Greene have decided to form a partnership. They have agreed that Morrison is to invest $267,000 and that Greene is to invest $89,000. 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:

1. Interest of 5% on original investments, salary allowances of $45,000 to Morrison and $75,000 to Greene, and the remainder equally
2. 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 $178,000 and (2) net income of $225,000. Round answers to the nearest whole dollar.

	(1)				(2)
	$178,000				$225,000
Plan		Morrison		Greene		Morrison		Greene

Answer 1

1) When net income is $178000:

Particulars	Morrison	Greene
5% interest on investments	13350	4450
Salary allowances	45000	75000
20% Bonus to Greene		11600
Remainder divided equally	14300	14300
TOTAL	72650	105350

Bonus to Greene is calculated as: 20%(Net income- Total salary allowances)

                                                  =20%{178000-(45000+75000)}= 20%*58000= $11600

Remainder to be divided equally: $178000-(13350+45000+4450+75000+11600)= 28600 i.e. $14300 each

2) When net income is $225000

Particulars	Morrison	Greene
5% interest on investments	13350	4450
Salary allowances	45000	75000
20% Bonus to Greene		21000
Remainder divided equally	33100	33100
TOTAL	91450	133550

Bonus to Greene is calculated as: 20%(Net income- Total salary allowances)

                                                  =20%{225000-(45000+75000)}= 20%*105000= $21000

Remainder to be divided equally: $225000-(13350+45000+4450+75000+21000)= 66200 i.e. $33100 each