Question

DIVISION OF PARTNERSHIP EARNINGS

profit-and-loss ratio.

ATKINS, CAPITAL
Date Debit Credit Balance
Jan. 1 Balance . . . . . . . . . . . . . $162,000 $162,000
July 1 Additional Investment . . . 50,000 212,000
Sept. 3 Permanent reduction . . . . $30,000 $182,000
BRILL, CAPITAL
Date Debit Credit Balance
Jan. 1 Balance . . . . . . . . . . . . . $126,000 $126,000
COREY, CAPITAL
Date Debit Credit Balance
Jan. 1 Balance . . . . . . . . . . . . . $72,000 $72,000
Sept. 5 Additional investment. . . . 20,000 92,000

Net income is to be divided by allowing interest at 10% annually on the partners’ beginning of-
the-year investment capital and dividing the remainder 6/3/1 respectively.
a. The current year’s operations produced a $300,000 net income.
b. The current year’s operations produced an $80,000 net loss.

In this question I don't understand how they got the 6/3/1 ratio?

Can you please explain to me hoe to calculate this so I can see the 6/3/1 ratio?

Thanks, George. Alberta Canada

Answer 1

Answer

• The profit sharing ratio is given in the question as 6:3:1. It is not to be calculated, it has already been provided.
• However, on the basis of 6:3:1, the Net Income is to be distributed.
• 6 + 3 + 1 = 10. Hence, Share of:
  --Atkings = 6 / 10
  --Brill = 3 / 10, and
  --Corey = 1 / 10
• Check out below as to how 6/10, 3/10 and 1/10 is used to distribute the Net Income /(loss)
• Requirement ‘a’

				Net Income
	Atkins	Brill	Corey	Distributed	To be distributed
Net Income					$300,000
Interest on Capital at 10%	$16,200	$12,600	$7,200	$36,000	$264,000
$264,000 shared in ratio of 6:3:1	$158,400 [264000 x 6/10]	$79,200 [264000 x 3/10]	$26,400 [264000 x 1/10]	$264,000	$0
Total Net Income distributed	$174,600	$91,800	$33,600	$300,000

• Requirement ‘b’

				Net Income
	Atkins	Brill	Corey	Distributed	To be distributed
Net Income					($80,000)
0	$0	$0		$0	($80,000)
Interest on Capital at 10%	$16,200	$12,600	$7,200	$36,000	($116,000)
$(116,000) shared in ratio of 6:3:1	($69,600) =116000 x 6/10	($34,800) = 116000 x 3/10]	($11,600) = 116000 x 1/10	($116,000)	$0
Total Net Income distributed	($53,400)	($22,200)	($4,400)	($80,000)