Question

Dividing Partnership Income

Morrison and Greene have decided to form a partnership. They have agreed that Morrison is to invest $210,000 and that Greene is to invest $70,000. 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 $60,000 to Morrison and $85,000 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 $142,000 and (2) net income of $240,000. Round answers to the nearest whole dollar.

Answer 1

Solution:

Division of Income		$142,000		$240,000
S. No	Particulars	Morrison	Greene	Morrison	Greene
a	Equal Division (1:1)	$71,000.00	$71,000.00	$120,000	$120,000
b	In the ratio of original investment (3:1)	$106,500.00	$35,500.00	$180,000	$60,000
c	In the ratio of time devoted (1:2)	$47,333.33	$94,666.67	$80,000	$160,000
d	Interest of 12% on original investment and remainder equally
	Interest Amount (Opening Capital * 5%) Morrison (210000*5%) Greene (70000*5%)	$10,500.00	$3,500.00	$10,500.00	$3,500.00
	Distribution of remaining income (1:1) Remainder income ($142,000) = ($142,000 - $10,500 - $3,500) = 128,000 Remainder income ($240,000) = ($240,000 - $10,500 - $3,500) = $226,000	$64,000.00	$64,000.00	$113,000.00	$113,000.00
	Total Share of Income (Interest + Remaining Distribution)	$74,500	$67,500	$123,500	$116,500
e	Interest of 12% on original investment, Salary Allowances and remainder in the ratio of 1:1
	Interest Amount (Opening Capital * 5%) Morrison (210000*5%) Greene (70000*5%)	$10,500.00	$3,500.00	$10,500.00	$3,500.00
	Salary Allowance	$60,000.00	$85,000.00	$60,000.00	$85,000.00
	Distribution of remaining income (1:1) Morrison - [($142,000 - $10,500 - $3,500 - $60,000 - $85000)*1/2], [($240,000 - $10,500 - $3,500 - $60,000 - $85000)*1/2] Greene - [($142,000 - $10,500 - $3,500 - $60,000 - $85000)*1/2], [($240,000 - $10,500 - $3,500 - $60,000 - $85000)*1/2]	-$8,500.00	-$8,500.00	$40,500.00	$40,500.00
	Total Share of Income (Interest + Salary + Remaining Distribution)	$62,000.00	$80,000.00	$111,000.00	$129,000.00
f	Interest of 12% on original investment, Salary Allowances, Bonus and remainder equally:
	Interest Amount (Opening Capital * 5%) Morrison (210000*5%) Greene (70000*5%)	$10,500.00	$3,500.00	$10,500.00	$3,500.00
	Salary Allowance	$60,000.00	$85,000.00	$60,000.00	$85,000.00
	Bonus to Amato [20% of (Net Income - Salary Allowance) $0, (240000-145000)*20%	$0.00	$0.00	$0.00	$19,000.00
	Distribution of remaining income (1:1) Morrison - [($142,000 - $10,500 - $3,500 - $60,000 - $85000-$0)*1/2], [($240,000 - $10,500 - $3,500 - $60,000 - $85000-$19,000)*1/2] Greene - [($142,000 - $10,500 - $3,500 - $60,000 - $85000-$0)*1/2], [($240,000 - $10,500 - $3,500 - $60,000 - $85000-$19,000)*1/2]	-$8,500.00	-$8,500.00	$31,000.00	$31,000.00
	Total Share of Income (Interest + Salary + Bonus + Remaining Distribution)	$62,000.00	$80,000.00	$101,500.00	$138,500.00