Question

Problem 12-2A Allocating partnership income and loss; sequential years LO P2

Irene Watts and John Lyon are forming a partnership to which Watts will devote one-fourth 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 $32,000 for Watts and $48,000 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $1,750 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $1,750 per month to Lyon, 8% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $14,000 net loss; year 2, $35,000 net income; and year 3, $58,333 net income.

Complete this question by entering your answers in the tabs below.

Year 1

Year 2

Year 3

Year 1 Plan (a) Watts Lyon Total Net Income (loss) $(14,000) Balance allocated in proportion to initial investments 1/3 32,000 1/3 48,000 80,000 Balance of income (loss) $(94,000) Shares to the partners $32,000 $48,000 $80,000 Plan (b) Watts Lyon Total Net Income (loss) $(14,000) Balance allocated in proportion to time devoted 0 Balance of income (loss) Shares to the partners $0 $0 $0 Plan (c) Watts Lyon Total Net Income (loss) $(14,000) Salary allowances 0 Balance of income (loss) Balance allocated in proportion to initial investments 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0 Plan (d) Watts Lyon Total Net Income (loss) $(14,000) Salary allowances 0 Balance of income (loss) Interest allowances 0 Balance of income (loss) Balance allocated equally 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0 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. Year 2 Plan (a) Watts Lyon Total Net Income (loss) $35,000 Balance allocated in proportion to initial investments 0 Balance of income (loss) $35,000 Shares to the partners $0 $0 $0 Plan (b) Watts Lyon Total Net Income (loss) $35,000 Balance allocated in proportion to time devoted 0 Balance of income (loss) Shares to the partners $0 $0 $0 Plan (c) Watts Lyon Total Net Income (loss) $35,000 Salary allowances 0 Balance of income (loss) Balance allocated in proportion to initial investments 0 Balance of income (loss) $35,000 Shares of the partners $0 $0 $0 Plan (d) Watts Lyon Total Net Income (loss) $35,000 Salary allowances 0 Balance of income (loss) Interest allowances 0 Balance of income (loss) Balance allocated equally 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0

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.

Year 3 Plan (a) Watts Lyon Total Net Income (loss) $58,333 Balance allocated in proportion to initial investments 0 Balance of income (loss) $58,333 Shares to the partners $0 $0 $0 Plan (b) Watts Lyon Total Net Income (loss) $58,333 Balance allocated in proportion to time devoted 0 Balance of income (loss) Shares to the partners $0 $0 $0 Plan (c) Watts Lyon Total Net Income (loss) $58,333 Salary allowances 0 Balance of income (loss) Balance allocated in proportion to initial investments 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0 Plan (d) Watts Lyon Total Net Income (loss) $58,333 Salary allowances 0 Balance of income (loss) Interest allowances 0 Balance of income (loss) Balance allocated equally 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0

Answer 1

Year 1
Plan (a)		Watts		Lyon	Total
Net Income (loss)					(14,000)
Balance allocated in proportion to initial investments	40%(32,000/80,000)	(5,600 )(14,000*40%)	60%(48,000/80,000)	(8,400) (14,000*60%)	14,000
Balance of income (loss)					0
Shares to the partners		(5,600)		(8,400)	(14,000)
Plan (b)		Watts		Lyon	Total
Net Income (loss)					(14,000)
Balance allocated in proportion to time devoted	0.25 (1/4)	(2,800) (14,000*0.25/1.25)	1	(11,200) (14,000*1/1.25)	14,000
Balance of income (loss)					0
Shares to the partners		(2,800)		(11,200)	(14,000)
Plan (c)		Watts		Lyon	Total
Net Income (loss)					(14,000)
Salary allowances				1,750	(1,750)
Balance of income (loss)					(15,750)
Balance allocated in proportion to initial investments	40% (32,000/80,000)	(6,300) (15,750*40%)	60% (48,000/80,000)	(9,450)(15,750*60%)	15,750
Balance of income (loss)					0
Shares of the partners		(6,300)		(7,700)	(14,000)
Plan (d)		Watts		Lyon	Total
Net Income (loss)					(14,000)
Salary allowances				1750	(1750)
Balance of income (loss)					(15,750)
Interest allowances		2,560 (32,000*8%)		3,840 (48,000*8%)	(6,400)
Balance of income (loss)					(22,150)
Balance allocated equally		(11,075) (22,150*50%)		(11,075) (22,150*50%)	22,150
Balance of income (loss)					0
Shares of the partners		(8,515)		(5,485)	(14,000)

Year 2
Plan (a)		Watts		Lyon	Total
Net Income (loss)					35,000
Balance allocated in proportion to initial investments	40% (32,000/80,000)	14,000 (35,000*40%)	60% (48,000/80,000)	21,000 (35,000*60%)	(35,000)
Balance of income (loss)					0
Shares to the partners		14,000		21,000	35,000
Plan (b)		Watts		Lyon	Total
Net Income (loss)					35,000
Balance allocated in proportion to time devoted	0.25 (1/4)	7,000 (35,000*0.25/1.25)	1	28,000 (35,000*1/1.25)	(35,000)
Balance of income (loss)					0
Shares to the partners		7,000		28,000	35,000
Plan (c)		Watts		Lyon	Total
Net Income (loss)					35,000
Salary allowances				1,750	(1.750)
Balance of income (loss)					33,250
Balance allocated in proportion to initial investments	40% (32,000/80,000)	13,300 (33,250*40%)	60% (48,000/80,000)	19,950 (33,250*60%)	(33,250)
Balance of income (loss)					0
Shares of the partners		13,300		21,700	35,000
Plan (d)		Watts		Lyon	Total
Net Income (loss)					35,000
Salary allowances				1750	(1750)
Balance of income (loss)					33,250
Interest allowances		2,560 (32,000*8%)		3,840 (48,000*8%)	(6,400)
Balance of income (loss)					26,850
Balance allocated equally		13,425 (26,850*50%)		13,425 (26,850*50%)	(26,850)
Balance of income (loss)					0
Shares of the partners		15,985		19,015	35,000

Year 3
Plan (a)		Watts		Lyon	Total
Net Income (loss)					58,333
Balance allocated in proportion to initial investments	40% (32,000/80,000)	23,333 (58,333*40%)	60% (48,000/80,000)	35,000 (58,333*60%)	(58,333)
Balance of income (loss)					0
Shares to the partners		23,333		35,000	58,333
Plan (b)		Watts		Lyon	Total
Net Income (loss)					$58,333
Balance allocated in proportion to time devoted	0.25 (1/4)	11,667 (58,333*0.25/1.25)	1	46,666 (58,333*1/1.25)	(58,333)
Balance of income (loss)					0
Shares to the partners		11,667		46,666	58,333
Plan (c)		Watts		Lyon	Total
Net Income (loss)					$58,333
Salary allowances				1750	(1,750)
Balance of income (loss)					56,583
Balance allocated in proportion to initial investments	40% (32,000/80,000)	22,633 (56,583*40%)	60% (48,000/80,000)	33,950 (56,583*60%)	(56,583)
Balance of income (loss)					0
Shares of the partners		22,633		35,700	58,333
Plan (d)		Watts		Lyon	Total
Net Income (loss)					58,333
Salary allowances				1750	(1750)
Balance of income (loss)					56,583
Interest allowances		2,560 (32,000*8%)		3,840 (48,000*8%)	(6,400)
Balance of income (loss)					50,183
Balance allocated equally		25,091.5 (50,183*50%)		25,091.5 (50,183*50%)	(50,183)
Balance of income (loss)					0
Shares of the partners		27,651.5		30,681.5	58,333