Problem 12-2A Allocating partnership income and loss, sequential years LO P2 Ire
ID: 2493128 • Letter: P
Question
Problem 12-2A Allocating partnership income and loss, sequential years LO P2 Irene Watts and John Lyon are forming a partnership to which Watts will devote three-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 $36,000 for Watts and $54,000 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, 12% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $16,000 net loss; year 2, $40,000 net income; and year 3, $66,667 net income 2 Required Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered. (Amounts to be deducted should be indicated with a minus sign. Do not round intermediate calculations.)Explanation / Answer
1)Plan A = Ratio based on initial Investment
Watts Initial Investment = $36,000
Lyon Initial Investment = $54,000
Total Capital = $90,000
Watts share percentage = $36,000/$90,000 = 40%
Lyon share Percentage = $54,000/$90,000 = 60%
Balance Allocated based on Initial Investment = $16,000 (Net Loss)
Watt = -$16,000 x 40% = -$6,400
Lyon = -$16,000 x 60% = -$9600
Plan B
Percentage based on time devotion
Watt = 0.75
Lyon = 1
Total time = 1.75
Watts share percentage = 0.75/1.75 = 42.86%
Lyon share Percentage = 1/1.75 = 57.14%
Balance Allocated based on Time devoted = $16,000 (Net Loss)
Watt = -$16,000 x 42.86% = -$6,857.14
Lyon = -$16,000 x 57.14% = -$9142.86
c.Plan c
Salary allowance = $1250 x 12 months = $15000
Net loss= $16000
Total = $31,000
Watts share percentage = $36,000/$90,000 = 40%
Lyon share Percentage = $54,000/$90,000 = 60%
Watt share = $31,000 x 40% = -$12,400
Lyon Share = $15,000 - $31,000 x 60% = -$3,600
Plan D
Interest Allowance = 12% x Intial investment
Watt = 12% x $36,000 = $4320
Lyon = 12% x $54,000 = $6480
Total = $10,800
Watt = $4320 sal - 50% ($16000 NL+ $15,000 Sal+ $10,800 Int) = $25,220
Lyon = $15,000 sal + $6480 int - 50% ($16000 NL+ $15,000 Sal+ $10,800 Int = -$580
Lyon =