Question

Dividing Partnership Income

Morrison and Greene have decided to form a partnership. They have agreed that Morrison is to invest $174,000 and that Greene is to invest $58,000. 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. Equal division.
2. In the ratio of original investments.
3. In the ratio of time devoted to the business.
4. Interest of 5% on original investments and the remainder equally
5. Interest of 5% on original investments, salary allowances of $40,000 to Morrison and $70,000 to Greene, and the remainder equally
6. 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 $127,000 and (2) net income of $250,000. Round answers to the nearest whole dollar.

	(1)				(2)
	$127,000				$250,000
Plan		Morrison		Greene		Morrison		Greene
a.		$		$		$		$
b.		$		$		$		$
c.		$		$		$		$
d.		$		$		$		$
e.		$		$		$		$
f.		$		$		$		$

Answer 1

Computation of division of the net income between both the partners:

Net Income		$127,000		$250,000
Plan	Particulars	Morrison	Greene	Morrison	Greene
A	Equal Division i.e. 1:1	$63,500	$63,500	$125,000	$125,000
B	Ratio of original investment i.e 174:58	$95,250	$31,750	$187,500	$62,500
C	Ratio of time devoted i.e 1:2	$42,333	$84,667	$83,333	$166,667
D
	Interest @5% on capital	$8,700	$2,900	$8,700	$2,900
	Balance in equal ratio i.e. 1:1
	(127000-8700-2900)/2	$57,700	$57,700
	(250000-8700-2900)/2			$119,200	$119,200
	TOTAL	$66,400	$60,600	$127,900	$122,100
E
	Interest @5% on capital	$8,700	$2,900	$8,700	$2,900
	Salary Allowances	$40,000	$70,000	$40,000	$70,000
	Balance in equal ratio i.e. 1:1
	(127000-8700-2900-40000-70000)/2	$2,700	$2,700
	(250000-8700-2900-40000-70000)/2			$64,200	$64,200
	TOTAL	$51,400	$75,600	$112,900	$137,100
F
	Interest @5% on capital	$8,700	$2,900	$8,700	$2,900
	Salary Allowances	$40,000	$70,000	$40,000	$70,000
	Bonus
	20% (127000-40000-70000)		$3,400
	20% (250000-40000-70000)				$28,000
	Balance in equal ratio i.e. 1:1
	(127000-8700-2900-40000-70000-3400)/2	$1,000	$1,000
	(250000-8700-2900-40000-70000-28000)/2			$50,200	$50,200
	TOTAL	$49,700	$77,300	$98,900	$151,100