Question

Watts and Lyon are forming a partnership. Watts invests $31,500 and Lyon invests $58,500. The partners agree that Watts will work one-fourth of the total time devoted to the partnership and Lyon will work three-fourths. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $21,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $21,000 per year to Lyon, 11% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $19,000 net loss; Year 2, $47,500 net income; and Year 3, $79,167 net income.

Required:
Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered. (Enter all allowances as positive values. Enter losses and capital deficits, if any, as negative values. Do not round intermediate calculations. Round final answer to the nearest whole dollar.)
  

Answer 1