Question

Irene Watts and John Lyon are forming a partnership to which Watts will devote one-half time and Lyon will devote full time. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments, which they have agreed will be $42,000 for Watts and $63,000 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $6,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $6,000 per month to Lyon, 10% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $36,000 net loss; year 2, $90,000 net income; and year 3, $150,000 net income.

Required

Prepare three tables with the following column headings.

Income (Loss) Sharing Plan	Year____
	Calculations		Watts	Lyon

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. (Round answers to the nearest whole dollar.)

Check Plan d, year 1, Lyon’s share, $19,050

Answer 1

Answer 1.
Plan a.	Year 1
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					(36,000.00)
Balance allocated in propotion to intial Investments	($36,000) X 40%	(14,400.00)	($36,000) X 60%	(21,600.00)	(36,000.00)
Balance of Income (Loss)					-
Shares to partners		(14,400.00)		(21,600.00)
Plan a.	Year 2
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					90,000.00
Balance allocated in propotion to intial Investments	$90,000 X 40%	36,000.00	$90,000 X 60%	54,000.00	90,000.00
Balance of Income (Loss)					-
Shares to partners		36,000.00		54,000.00
Plan a.	Year 3
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					150,000.00
Balance allocated in propotion to intial Investments	$150,000 X 40%	60,000.00	$150,000 X 60%	90,000.00	150,000.00
Balance of Income (Loss)					-
Shares to partners		60,000.00		90,000.00
Percentage based on Intial Capital:
Watts = $42,000 / $105,000 = 40%
Lyon = $63,000 / 105,000 = 60%
Answer 2.
Plan b.	Year 1
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					(36,000.00)
Balance allocated in propotion of time devoted	($36,000) X 33.33%	(12,000.00)	($36,000) X 66.67%	(24,000.00)	(36,000.00)
Balance of Income (Loss)					-
Shares to partners		(12,000.00)		(24,000.00)
Plan b.	Year 2
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					90,000.00
Balance allocated in propotion of time devoted	$90,000 X 33.33%	30,000.00	$90,000 X 66.67%	60,000.00	90,000.00
Balance of Income (Loss)					-
Shares to partners		30,000.00		60,000.00
Plan b.	Year 3
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					150,000.00
Balance allocated in propotion of time devoted	$150,000 X 33.33%	50,000.00	$150,000 X 66.67%	100,000.00	150,000.00
Balance of Income (Loss)					-
Shares to partners		50,000.00		100,000.00
Percentage based on Time Devoted:
Watts = 0.5 /1.5 = 33.33%
Lyon = 1/1.5 = 66.67%
Answer 3.
Plan c.	Year 1
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					(36,000.00)
Salary Allowance		-	$6,000 X 12	72,000.00	72,000.00
Balance of Income (Loss)					(108,000.00)
Balance allocated in propotion to intial Investments	($108,000) X 40%	(43,200.00)	($108,000) X 60%	(64,800.00)	(108,000.00)
Balance of Income (Loss)					-
Shares to partners		(43,200.00)		7,200.00
Plan c.	Year 2
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					90,000.00
Salary Allowance		-	$6,000 X 12	72,000.00	72,000.00
Balance of Income (Loss)					18,000.00
Balance allocated in propotion to intial Investments	$18,000 X 40%	7,200.00	$18,000 X 60%	10,800.00	18,000.00
Balance of Income (Loss)					-
Shares to partners		7,200.00		82,800.00
Plan c.	Year 3
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					150,000.00
Salary Allowance		-	$6,000 X 12	72,000.00	72,000.00
Balance of Income (Loss)					78,000.00
Balance allocated in propotion to intial Investments	$78,000 X 40%	31,200.00	$78,000 X 60%	46,800.00	78,000.00
Balance of Income (Loss)					-
Shares to partners		31,200.00		118,800.00
Answer 4.
Plan d.	Year 1
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					(36,000.00)
Salary Allowance		-	$6,000 X 12	72,000.00	72,000.00
Balance of Income (Loss)					(108,000.00)
Interest Allowance	$42,000 X 10%	4,200.00	$63,000 X 10%	6,300.00	10,500.00
Balance of Income (Loss)					(118,500.00)
Balance allocated equally	($118,500) X 50%	(59,250.00)	($118,500) X 50%	(59,250.00)	(118,500.00)
Balance of Income (Loss)					10,500.00
Shares to partners		(55,050.00)		19,050.00
Plan d.	Year 2
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					90,000.00
Salary Allowance		-	$6,000 X 12	72,000.00	72,000.00
Balance of Income (Loss)					18,000.00
Interest Allowance	$42,000 X 10%	4,200.00	$63,000 X 10%	6,300.00	10,500.00
Balance of Income (Loss)					7,500.00
Balance allocated equally	$7,500 X 50%	3,750.00	$7,500 X 50%	3,750.00	7,500.00
Balance of Income (Loss)					10,500.00
Shares to partners		7,950.00		82,050.00
Plan d.	Year 3
	Watts		Lyon		Total
	Calculations	Amt.	Calculations	Amt.
Net Income (Loss)					150,000.00
Salary Allowance		-	$6,000 X 12	72,000.00	72,000.00
Balance of Income (Loss)					78,000.00
Interest Allowance	$42,000 X 10%	4,200.00	$63,000 X 10%	6,300.00	10,500.00
Balance of Income (Loss)					67,500.00
Balance allocated equally	$67,500 X 50%	33,750.00	$67,500 X 50%	33,750.00	67,500.00
Balance of Income (Loss)					10,500.00
Shares to partners		37,950.00		112,050.00