Question

Tyler Hawes and Piper Albright formed a partnership, investing $230,400 and $153,600, respectively.

Determine their participation in the year's net income of $384,000 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 $60,000 and $84,000, respectively, and the balance divided equally.

Allowance of interest at the rate of 15% on original investments, salary allowances of $60,000 and $84,000, respectively, and the remainder divided equally.

Answer 1

Calculation of participation in income in each case

a) If there is no agreement concerning division of net income, then income will be divided equally.

Tyler = Net Income*50% = $384,000*50% = $192,000

Piper = $384,000*50% = $192,000

b) Ratio of original capital investment = Tyler:Piper = $230,400 : $153,600

Total capital = $230,400+$153,600 = $384,000

Tyler = Net Income*Ratio of original capital investment

= $384,000*($230,400/$384,000) = $230,400

Piper = $384,000*($153,600/$384,000) = $153,600

c) Interest on Tyler's capital = $230,400*15% = $34,560

Interest on Piper's capital = $153,600*15% = $23,040

Remaining Income to be distibuted in 2:3 = $384,000 - $34,560 - $23,040 = $326,400

Tyler share = $326,400*2/5 = $130,560

Piper share = $326,400*3/5 = $195,840

Total participation in income by Tyler = Interest on capital +Share in remaining income

= $34,560+$130,560 = $165,120

Total participation in income by Piper = Interest on capital +Share in remaining income

= $23,040+$195,840 = $218,880

d) Salary allowance to Tyler = $60,000

Salary allowance to Piper = $84,000

Remaining Income = $384,000 - $60,000 - $84,000 = $240,000

Tyler share = $240,000*1/2 = $120,000

Piper share = $240,000*1/2 = $120,000

Total participation in income by Tyler = Salary allowance+Share in remaining income

= $60,000+$120,000 = $180,000

Total participation in income by Piper = Salary allowance +Share in remaining income

= $84,000+$120,000 = $204,000

e) Remaining Income = $384,000 - $60,000 - $84,000 - $34,560 - $23,040 = $182,400

Tyler share = $182,400*1/2 = $91,200

Piper share = $182,400*1/2 = $91,200

Total participation in income by Tyler = Salary allowance+Interest on capital+Share in remaining income

= $60,000+$34,560+$91,200 = $185,760

Total participation in income by Piper = Salary allowance +Interest on capital+Share in remaining income

= $84,000+$23,040+$91,200 = $198,240