Problem 12-2A Allocating partnership income and loss; sequential years P2 Irene
ID: 2559765 • Letter: P
Question
Problem 12-2A Allocating partnership income and loss; sequential years P2
Irene Watts and John Lyon are forming a partnership to which Watts will devote one-half 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 $42,000 for Watts and $63,000 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $6,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $6,000 per month to Lyon, 10% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $36,000net loss; year 2, $90,000 net income; and year 3, $150,000 net income.
Required
Prepare three tables with the following column headings.
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. (Round answers to the nearest whole dollar.)
Income (Loss)Sharing Plan Year____ Calculations Watts Lyon
Explanation / Answer
Preliminary calculations Plan (a) & Plan (c) Percentages based on initial investments Watts = $42,000/$105,000 = 40% Lyon = $63,000/$105,000 = 60% Plan (b) Percentages based on time Watts = 0.5/1.5 = 33 1/3% Lyon = 1.0/1.5 = 66 2/3% Plan (c) & Plan (d) Salary allowance Lyon= 12 * $6,000 = $72,000 Plan (d) Interest allowances Watts = 10% * $42,000 = $ 4,200 Lyon= 10% * $63,000 = $ 6,300 Income (Loss) Year 1 Sharing Plan Calculations Watts Lyon (a) 40% * $36,000 loss $(14,400) 60% * $36,000 loss $(21,600) (b) 33 1/3% *$36,000 loss $(12,000) 66 2/3% *$36,000 loss $(24,000) (c) Salary allowance $ 72,000 40% * ($36,000 loss + $72,000 salary) $(43,200) 60% * ($36,000 loss + $72,000 salary) ________ -64,800 Totals $(43,200) $ 7,200 (d) Salary allowance $ 72,000 Interest allowances $ 4,200 6,300 50% * ($36,000 loss + $72,000 salary + $10,500 interest) -59,250 -59,250 Totals $(55,050) $ 19,050 Income (Loss) Year 2 Sharing Plan Calculations Watts Lyon (a) 40% * $90,000 income $36,000 60% * $90,000 income $54,000 (b) 33 1/3% *$90,000 income $30,000 66 2/3% *$90,000 income $60,000 (c) Salary allowance $72,000 40% *($90,000 income - $72,000 salary) $ 7,200 60% * ($90,000 income - $72,000 salary) _______ 10,800 Totals $ 7,200 $82,800 (d) Salary allowance $72,000 Interest allowances $ 4,200 6,300 50% * ($90,000 income - $72,000 salary - $10,500 interest) 3,750 3,750 Totals $ 7,950 $82,050 Income (Loss) Year 3 Sharing Plan Calculations Watts Lyon (a) 40% *$150,000 income $60,000 60% * $150,000 income $ 90,000 (b) 33 1/3% * $150,000 income $50,000 66 2/3% *$150,000 income $100,000 (c) Salary allowance $ 72,000 40% *($150,000 income - $72,000 salary) $31,200 60% * ($150,000 income - $72,000 salary) _______ 46,800 Totals $31,200 $118,800 (d) Salary allowance $ 72,000 Interest allowances $ 4,200 6,300 50% *($150,000 income - $72,000 salary - $10,500 interest) 33,750 33,750 Totals $37,950 $112,050