Question
In: Accounting
Irene Watts and John Lyon are forming a partnership to which Watts will devote one-half time...
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 $31,500 for Watts and $38,500 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $2,250 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $2,250 per month to Lyon, 11% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $18,000 net loss; year 2, $45,000 net income; and year 3, $75,000 net income.
Solutions
Expert Solution
| Income (Loss) | Year 1 | ||||
| Sharing Plan | Calculations | Watts | Lyon | ||
| (a) | 45% x 18000 loss | -8100 | |||
| 55% x 18000 loss | -9000 | ||||
| (b) | 33 1/3% x 18000 loss | -6000 | |||
| 66 2/3% x 18000 loss | -12000 | ||||
| (c) | Salary allowance | 27000 | |||
| 45% x (18000 loss + 27000 salary) | -20250 | ||||
| 55% x (18,000 loss + 27,000 salary) | ________ | -24,750 | |||
| Totals | -20250 | 2,250 | |||
| (d) | Salary allowance | 27000 | |||
| Interest allowances | 3465 | 4,235 | |||
| 50% x (18000 loss + 27000 Salary + 7700 Interest) | -26350 | -26350 | |||
| Totals | -22,885 | 4,885 | |||
| Income (Loss) | Year 2 | ||||
| Sharing Plan | Calculations | Watts | Lyon | ||
| (a) | 45% x 45000 | 20250 | |||
| 55% x 45000 | 24750 | ||||
| (b) | 33 1/3% x 45000 | 15000 | |||
| 66 2/3% x 45000 | 30000 | ||||
| (c) | Salary allowance | 27000 | |||
| 45% x (45000 - 27000 salary) | 8100 | ||||
| 55% x (45,000 - 27,000 salary) | ________ | 9,900 | |||
| Totals | 8100 | 36,900 | |||
| (d) | Salary allowance | 27000 | |||
| Interest allowances | 3465 | 4,235 | |||
| 50% x (45000 - 27000 Salary - 7700 Interest) | 5150 | 5150 | |||
| Totals | 8,615 | 36,385 | |||
| Income (Loss) | Year3 | ||||
| Sharing Plan | Calculations | Watts | Lyon | ||
| (a) | 45% x 75000 | 33750 | |||
| 55% x 75000 | 41250 | ||||
| (b) | 33 1/3% x 75000 | 25000 | |||
| 66 2/3% x 75000 | 50000 | ||||
| (c) | Salary allowance | 27000 | |||
| 45% x (75000 - 27000 salary) | 21600 | ||||
| 55% x (75,000 - 27,000 salary) | ________ | 26,400 | |||
| Totals | 21600 | 53,400 | |||
| (d) | Salary allowance | 27000 | |||
| Interest allowances | 3465 | 4,235 | |||
| 50% x (75000 - 27000 Salary - 7700 Interest) | 20150 | 20150 | |||
| Totals | 23,615 | 51,385 | |||
ekkarill92 answered 1 year agoRelated Solutions
Irene Watts and John Lyon are forming a partnership to which Watts will devote one-half time...
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 $40,000 for Watts and
$60,000 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...
Irene Watts and John Lyon are forming a partnership to which Watts will devote one-half time...
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