Question

Sally and Samantha have decided to form a partnership. They have agreed that Sally is to invest $195,000 and that Samantha is to invest $65,000. Sally is to devote one-half time to the business, and Samantha is to devote full time. The following plans for the division of income are being considered:

a.      Equal division.

b.      In the ratio of original investments.

c.      In the ratio of time devoted to the business.

d.      Interest of 5% on original investments and the remainder equally

e.      Interest of 5% on original investments, salary allowances of $50,000 to Sally and $85,000 to Samantha, and the remainder equally

f.       Plan (e), except that Samantha is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances

Instructions:

Determine the division of Net Income of $235,000.

Answer 1

Solution:

Determine the Division of Net Income

1. Equal Division of Net Income

Particulars	Sally	Samantha
Net income of $235,000 is distributed in equal proportion, i.e. in (1 : 1)	$117,500	$117,500

2. In the ratio of Original Investment

Particulars	Sally	Samantha
Net income of $235,000 is distributed in the ratio of 195,000 : 65,000 or (3 : 1)	$176,250	$58,750

3. In the ratio of time devoted to the business

Particulars	Sally	Samantha
Let the time devoted by Sally be 4 hrs then the time devoted by Samantha be 8 hrs. Therefore, the ratio will be 4 : 8 or (1 : 2)	$78,333	$156,667

4. Interest of 5% on Original Investment and remainder equally

Particulars	Sally	Samantha
5% Interest on Original Investment Remaining Income of $222,000 ($235,000 - $13,000) is distributed in (1 : 1)	$9,750 $111,000	$3,250 $111,000
Total Income	$120,750	$114,250

5. Interest of 5% on Original Investment, salary allowances of $50,000 to Sally and $85,000 to Samantha, and remainder equally

Particulars	Sally	Samantha
5% Interest on Original Investment Salary Allowances Remaining Income of $87,000 ($235,000 - $13,000 - $135,000) is distributed in (1 : 1)	$9,750 $50,000 $43,500	$3,250 $85,000 $43,500
Total Income	$103,250	$131,750

6. Plan (e), except that Samantha is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances

Particulars	Sally	Samantha
5% Interest on Original Investment Salary Allowances Bonus [20% of $100,000 ($235,000 - $135,000)] Remaining Income of $67,000 ($235,000 - $13,000 - $135,000 - $20,000) is distributed in (1 : 1)	$9,750 $50,000 - $33,500	$3,250 $85,000 $20,000 $33,500
Total Income	$93,250	$141,750