Question

Year 1 Year 2 Year 3 Complete the tables, one for each of the first three years, by showing how to allocate partnership inc partners under each of the four plans being considered Year 1 Plan (a) Net Income (loss) Balance allocated in proportion to Watts Lyon Total $ (17,000) initial investments Balance of income (loss) Shares to the partners Plan (b) Net Income (loss) Balance allocated in proportion to Watts Lyon Total $ (17,000) time devoted Balance of income (loss) Shares to the partners Plan (c) Net Income (loss) Salary allowances Balance of income (loss) Balance allocated in proportion to Watts Lyon Total $ (17,000) initial investments Balance of income (loss) Shares of the partners Plan (d) Net Income (loss) Salary allowances Balance of income (loss) Interest allowances Balance of income (loss) Balance allocated equally Balance of income (loss) Shares of the partners Watts Lyon Total $ (17,000)
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 $35,000 for Watts and $65,000 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $1,250 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $1,250 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, $17,000 net loss; year 2, $42,500 net income; and year 3, $70,833 net income.

Answer 1