Question

Activation Exercise 12-2: Dividing Partnership Net Income by Services of Partners Terms and Definitions The income of a partnership is divided among the partners each period. The income or losses of the partnership are divided as specified in the partnership agreement . If there is no agreement, income and losses are divided equally . Feedback Check My Work Most partnerships specify how income or losses are to be divided. Income or losses of a partnership are divided equally if no partnership agreement exists. Understanding the Business Transaction A partnership agreement may divide income based upon (1) salary allowances, or (2) salary allowances and interest on capital balances of each partner. The amounts of the distributions reflect differences in partners' abilities and time devoted to the partnership. The partnership of I.M. Withhim and H.E. Swithme earned $202,790 for its first full year. The partnership agreement provides for the following division of income: Monthly Salary Allowance I.M. Withhim $6,190 H.E. Swithme $5,470 2. Interest of 9% on each partners January 1 Capital balance. Capital, I.M. Withhim, January 1 $232,500

Answer 1

Division of Net Income:

	I.M. Withhim	H.E. Swithme	Total
Annual salary allowance ($6190 x 12);($5470 x 12)	74280	65640	139920
Interest allowance (9% x $232500);(9% x $150500)	20925	13545	34470
Remaining income ($28400/2)	14200	14200	28400
Division of net income	109405	93385	202790

Recording in the Accounting System:

Income Summary	202790
I.M. Withhim, capital		109405
H.E. Swithme, capital		93385

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