Question

Holly and Luke formed a partnership, investing $240,000 and $80,000, respectively. Determine their participation in the year's net income of $200,000 under each of the following independent assumptions:

No agreement concerning division of net income;

Divided in the ratio of original capital investment;

Interest at the rate of 15% allowed on original investments and the remainder divided in the ratio of 2:3;

Salary allowances of $50,000 and $70,000, respectively, and the balance divided equally;

Allowance of interest at the rate of 15% on original investments, salary allowances of $50,000 and $70,000, respectively, and the remainder divided equally.

Answer 1

		Holly	Luke	Total
1	Net Income (1:1)	$       1,00,000	$       1,00,000	$ 2,00,000
2	Net Income (3:1)	$       1,50,000	$           50,000	$ 2,00,000
3	Interest allowance @ 15% + remaining Net Income (2:3)	$           96,800	$       1,03,200	$ 2,00,000
4	Salary allowance + remaining Net Income (1:1)	$           90,000	$       1,10,000	$ 2,00,000
5	Interest allowance @ 15% + Salary allowance + remaining Net Income (1:1)	$       1,02,000	$           98,000	$ 2,00,000
	Workings:
		Holly	Luke	Total
	Original Investment	$       2,40,000	$           80,000
	Original Investment ratio	$2,40,000 / $3,20,000	$80,000 / $3,20,000
		3 / 4	1/4
1	Net Income (1:1)	($2,00,000 X 1/2)	($2,00,000 X 1/2)
		$       1,00,000	$       1,00,000
2	Net Income (3:1)	($2,00,000 X 3/4)	($2,00,000 X 1/4)
		$       1,50,000	$           50,000
3	Interest allowance @ 15% + remaining Net Income (2:3)
	Toal Net income			$ 2,00,000
	Interest allowance @ 15%	$2,40,000 X 15%	$80,000 X 15%
	(a)	$           36,000	$           12,000	$     48,000
	Remaining Net Income			$ 1,52,000
	remaining Net Income (2:3)	($1,52,000 X 2/5)	($1,52,000 X 3/5)
	(b)	$           60,800	$           91,200	$ 1,52,000
	Total allocated Net Income (a+b)	$           96,800	$       1,03,200	$ 2,00,000
4	Salary allowance + remaining Net Income (1:1)
	Toal Net income			$ 2,00,000
	Salary allowance (a)	$           50,000	$           70,000	$ 1,20,000
	Remaining Net Income			$     80,000
	Remaining Net Income (1:1)	($80,000 X 1/2)	($80,000 X 1/2)
	(b)	$           40,000	$           40,000	$     80,000
	Total allocated Net Income (a+b)	$           90,000	$       1,10,000	$ 2,00,000
5	Interest allowance @ 15% + Salary allowance + remaining Net Income (1:1)
	Toal Net income			$ 2,00,000
	Interest allowance @ 15%	$2,40,000 X 15%	$80,000 X 15%
	(a)	$           36,000	$           12,000	$     48,000
	Remaining Net Income			$ 1,52,000
	Salary allowance (b)	$           50,000	$           70,000	$ 1,20,000
	Remaining Net Income			$     32,000
	Remaining Net Income (1:1)	($32.000 X 1/2)	($32.000 X 1/2)
	(c)	$           16,000	$           16,000	$     32,000
	Total allocated Net Income (a+b+c)	$       1,02,000	$           98,000	$ 2,00,000