In: Accounting
Dividing Partnership Income
Desmond Drury and Ty Wilkins have decided to form a partnership. They have agreed that Drury is to invest $57,600 and that Wilkins is to invest $14,400. Drury is to devote full time to the business, and Wilkins is to devote one-half time. The following plans for the division of income are being considered:
Equal division.
In the ratio of original investments.
In the ratio of time devoted to the business.
Interest of 10% on original investments and the remainder in the ratio of 3:2.
Interest of 10% on original investments, salary allowances of $49,000 to Drury and $24,500 to Wilkins, and the remainder equally.
Plan (e), except that Wilkins is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances.
Required:
For each plan, determine the division of the net income under each of the following assumptions: (1) net income of $216,000 and (2) net income of $95,100.
(1) | (2) | |||||||
$216,000 | $95,100 | |||||||
Plan | Drury | Wilkins | Drury | Wilkins | ||||
a. | $ | $ | $ | $ | ||||
b. | $ | $ | $ | $ | ||||
c. | $ | $ | $ | $ | ||||
d. | $ | $ | $ | $ | ||||
e. | $ | $ | $ | $ | ||||
f. | $ | $ | $ | $ |
Solution:
Division of Income | $216,000 | $95,100 | |||
S. No | Particulars | Drury | Wilkins | Drury | Wilkins |
a | Equal Division (1:1) | $108,000.00 | $108,000.00 | $47,550 | $47,550 |
b | In the ratio of original investment (4:1) | $172,800.00 | $43,200.00 | $76,080 | $19,020 |
c | In the ratio of time devoted (2:1) | $144,000.00 | $72,000.00 | $63,400 | $31,700 |
d | Interest of 10% on original investment and remainder in the ratio of 3:2 | ||||
Interest Amount (Opening Capital *
10%) Drury (57600*10%) Wilkins (14400*10%) |
$5,760.00 | $1,440.00 | $5,760.00 | $1,440.00 | |
Distribution of remaining income
(3:2) Remainder income ($216,000) - ($216,000 - $5,760 - $1,440) = $208,800 Remainder income ($95,100) - ($95,100 - $5,760 - $1,440) = $87,900 |
$125,280.00 | $83,520.00 | $52,740.00 | $35,160.00 | |
Total Share of Income (Interest + Remaining Distribution) | $131,040 | $84,960 | $58,500 | $36,600 | |
e | Interest of 10% on original investment, Salary Allowances and remainder in the ratio of 1:1 | ||||
Interest Amount (Opening Capital *
10%) Drury (57600*10%) Wilkins (14400*10%) |
$5,760.00 | $1,440.00 | $5,760.00 | $1,440.00 | |
Salary Allowance | $49,000.00 | $24,500.00 | $49,000.00 | $24,500.00 | |
Distribution of remaining income
(1:1) Drury - [($216,000 - $5,760 - $1,440 - $49,000 - $24500)*1/2], [($95,100 - $5,760 - $1,440 - $49,000 - $24500)*1/2] Wilikns - [($216,000 - $5,760 - $1,440 - $49,000 - $24500)*1/2], [($95,100 - $5,760 - $1,440 - $49,000 - $24500)*1/2] |
$67,650.00 | $67,650.00 | $7,200.00 | $7,200.00 | |
Total Share of Income (Interest + Salary + Remaining Distribution) | $122,410.00 | $93,590.00 | $61,960.00 | $33,140.00 | |
f | Interest of 10% on original investment, Salary Allowances, Bonus and remainder equally: | ||||
Interest Amount (Opening Capital *
10%) Drury (57600*10%) Wilkins (14400*10%) |
$5,760.00 | $1,440.00 | $5,760.00 | $1,440.00 | |
Salary Allowance | $49,000.00 | $24,500.00 | $49,000.00 | $24,500.00 | |
Bonus to Wilkins [20% of (Net Income -
Salary Allowance) [216000 - 73500)*20%, (95100-73500)*20% |
$0.00 | $28,500.00 | $0.00 | $4,320.00 | |
Distribution of remaining income
(1:1) Drury - [($216,000 - $5,760 - $1,440 - $49,000 - $24500 - $28,500)*1/2], [($95,100 - $5,760 - $1,440 - $49,000 - $24500 - $4,320)*1/2] Wilikns - [($216,000 - $5,760 - $1,440 - $49,000 - $24500 - $28,500)*1/2], [($95,100 - $5,760 - $1,440 - $49,000 - $24500 - $4,320)*1/2] |
$53,400.00 | $53,400.00 | $5,040.00 | $5,040.00 | |
Total Share of Income (Interest + Salary + Bonus + Remaining Distribution) | $108,160.00 | $107,840.00 | $59,800.00 | $35,300.00 |