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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.

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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 7 months ago
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