Question

Question 1

Pac-link Technologies is a partnership owned and operated by Tom Kennedy and Mike McConnell. To recognize the fact that the partners have invested significantly different amounts of capital and that Tom works full time, while Mike works only part time, the partnership agreement states that the profit will be allocated as follows: An interest allowance of 3% of each partner’s beginning capital balance plus a salary allowance of $ 85 per hour worked. Any remaining profit or loss after calculation of these allowances will be allocated equally. At January 1, 2021, Tom’s capital account balance was $ 15,000 and Mike’s was $ 20,000. During the year ended December 31, 2021, Tom worked 1,200 hours and Mike worked 550 hours. 

Instructions:

a) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2021 is $ 196,000. 

b) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2021 is $ 88,000.

Answer 1

Req a.
Allocation of Income
			Tom	Mike	Total
Net Income for the period			196000
Less: Salary allowance	102000	46750	-148750
Remaining Income(Loss)			47250
Less: Interest allowance	450	600	-1050
Remaining Income(Loss)			46200
Remaining income shares equally	23100	23100	-46200
Remaining Income(Loss)			0
Share of each partner	125550	70450	196000
Req b.
Allocation of Income
			Tom	Mike	Total
Net Income for the period			88000
Less: Salary allowance	102000	46750	-148750
Remaining Income(Loss)			-60750
Less: Interest allowance	450	600	-1050
Remaining Income(Loss)			-61800
Remaining loss shared equally	-30900	-30900	61800
Remaining Income(Loss)			0
Share of each partner	71550	16450	88000