Question

Dividing Partnership Income

Tyler Hawes and Piper Albright formed a partnership, investing $187,500 and $62,500, respectively.

Determine their participation in the year's net income of $295,000 under each of the following independent assumptions:

1. No agreement concerning division of net income.
2. Divided in the ratio of original capital investment.
3. Interest at the rate of 6% allowed on original investments and the remainder divided in the ratio of 2:3.
4. Salary allowances of $38,000 and $48,000, respectively, and the balance divided equally.
5. Allowance of interest at the rate of 6% on original investments, salary allowances of $38,000 and $48,000, respectively, and the remainder divided equally.

	Hawes	Albright
(a)	$	$
(b)	$	$
(c)	$	$
(d)	$	$
(e)	$	$

Answer 1

Answer:

	Hawes	Albright	Total
(a) Net income (1:1)	$147,500	$147,500	$295,000
(b)Net income (3:1) (A)	$221,250	$73,750	$295,000
(c) Interest Allowance (B)	$11,250	$3750	$15,000
Remainder in the ratio 2:3	$112,000	$168,000	$280,000
Net Income	$123,250	$171,750	$295,000
(d) Salary Allowance	$38,000	$48,000	$86,000
Balance (1:1)	$104,500	$104,500	209,000
Net Income	$142,500	$152,500	$295,000
(e) Interest Allowance	$11,250	$3,750	$15,000
Salary Allowance	$38,000	$48,000	$86,000
Balance (1:1)	$97,000	$97,000	$194,000
Net Income	$146,250	$148,750	$ 295,000

(A) Capital ratio = $187,500 : $62,500 = 3:1

(B) Interest Allowance @6%

Hawes = $187,500 * 6% = $11,250

Albright = $62,500 * 6% = $ 3,750