Question

The partnership agreement of Ahmed and Ali has the following provisions:

1 - Partners are to earn 10% interest on their average capital balances

2 - Ali is to earn a 5% bonus on any net income above 40,000

3 - Ahmed and Ali are to earn salaries of 25,000 and 20,000 respectively

4 - Any remaining income or loss is to be divided using a 4:2 ratio

Ahmed's average capital balance is 130,000 and Ali's is 30,000

Net income for the year is 60,000

Required:

1 - Provide the amount of net income left to divide AFTER Step 1 (allocated interest on capital balances)

2 - What is the amount of the bonus to be paid to Ali? (If any)

3 - What is the total amount of net income allocated to Ahmed?

4 - What is the total amount of net income allocated to Ali?

Answer 1

Solution:-

   Profit & Loss Appropriation A/c

Particulars	Amount	Particulars	Amount
To Interest on Capital A/c (at the rate 10% of Avg Cap.) Ahmed :- (130000*10/100) = +13000 Ali:- (30000*10/100) =+ 3000 To Bonus of Ali (@ 5% of Net Profit above 40000 )*                                     To Salaries Ahmed:- +25000 Ali:- +20000	16000 1000 45000	By P&L A/c (tranf. Balance) By Loss:- (2000) Ahmed:- 2000*4/6= 1333 Ali:- 2000*2/6= 667	60000 2000
	62000		62000

*Calculation of Bonus of Ali

Remaining Net Profit=

Net Profit- 60000 (which is above 40000)

60000-40000= 20000*5/100= 1000

____________________________________

1. Answer no. 1= Net Profit After Intt on capital

= 60000- (13000 + 3000)= 44000

2. Answer no. 2= Bonus of Ali = 1000

3. Answer no. 3= Total amount of Net Income to Ahmed = 13000 (Intt on cap) + 25000 (Salary) - 1333 (loss) = 36667

4. Answer no. 4= Total amount of Net Income to Ali= 3000 (Intt on cap) + 20000 (Salary) - 667 (loss) = 22333

Thank you