Dividing Partnership Income Morrison and Greene have decided to form a partnersh
ID: 2607741 • Letter: D
Question
Dividing Partnership Income Morrison and Greene have decided to form a partnership. They have agreed that Morrison is to invest $150,000 and that Greene is to invest $50,000. Morrison is to devate one-half time to the business, and Greene is to devote full time. The following plans for the division of income are being considered a. Equal division b. In the ratio of original investments c. In the ratio of time devoted to the business. d. Interest of 6% on original investments and the remainder equal e. Interest of 6% on original investments, salary allowances of $40,000 to Morrison and $70,000 to Greene, and the remainder equally a exceeds the Required: For each plan, determine the division of the net income under each of the following assumptions: (1) net income of $115,000 and (2) net income of $200,000. Round answers to the nearest whole dollar (13 $200,000 Plan Morrison Greene Morrison Greene 1.Explanation / Answer
Answer
a.
Ratio = 1:1
Case 1
Morrison Share = ½*115,000
= $57,500
Greene Share = ½*115,000
= $57,500
Case 2
Morrison Share = ½ *200,000
= $100,000
Greene Share = ½*200,000
= $100,000
b.
Ratio = Morrison : Greene
$150,000 : $50,000
Ratio = 3:1
Case 1
Morrison Share = 3/4 * 115,000
= $86,250
Greene Share = 1/4 *115,000
= $28,750
Case 2
Morrison Share = 3/4 * 200,000
= $150,000
Greene Share = 1/4 *200,000
= $150,000
c.
Ratio = Morrison : Greene
0.5 : 1
Ratio = 0.5 : 1
Case 1
Morrison Share = 0.5/1.5 * 115,000
= $38,333
Greene Share = 1/1.5 *115,000
= $76,667
Case 2
Morrison Share = 0.5/1.5 * 200,000
= $66,667
Greene Share = 1/1.5 *200,000
= $133,333
d.
Morrison Interest = 6% * 150,000 = $9,000
Greene Interest = 6% * 50,000 = $3,000
It is mentioned that profit after interest will be divided equally
Case 1
Profit after Interest = 115,000 – (9,000 + 3,000)
= 103,000
Partner Share = Interest + Profit Share
Morrison Share = 9,000 + (1/2 * 103,000)
= $60,500
Greene Share = 3,000 + (1/2 * 103,000)
= $54,500
Case 2
Profit after Interest = 200,000 – (9,000 + 3,000)
= 188,000
Partner Share = Interest + Profit Share
Morrison Share = 9,000 + (1/2 * 188,000)
= $103,000
Greene Share = 3,000 + (1/2 * 188,000)
= $97,000
e.
Case 1
Morrison
Greene
Interest
9,000
(6% * 150,000)
3,000
(6% * 50,000)
Salary Allowance
40,000
70,000
Total
49,000
73,000
122,000
(49,000 + 73,000)
Now the total profit required is $122,000 but we only have $115,000, so we will divide $115,000 in their total share i.e. 49,000 : 73,000
Morrison Share = (49,000 / 122,000) * 115,000
= $46,188.52
Greene Share = (73,000 / 122,000) * 115,000
= $68,811.48
Case 2
Morrison
Greene
Interest
9,000
(6% * 150,000)
3,000
(6% * 50,000)
Salary Allowance
40,000
70,000
Total
49,000
73,000
122,000
(49,000 + 73,000)
Profit is $200,000, so remaining profit i.e. $78,000 (200,000 – 122,000) will be divided equally
Morrison Share = 49,000 + (1/2 * 78,000)
= $88,000
Greene Share = 73,000 + (1/2 * 78,000)
= $112,000
f.
Case 1
Morrison
Greene
Interest
9,000
(6% * 150,000)
3,000
(6% * 50,000)
Salary Allowance
40,000
70,000
Bonus
-
1,000
Total
49,000
74,000
123,000
(49,000 + 74,000)
Greene Bonus = 20% * (Net Income – Total Salary Allowance)
= 20% * (115,000 – 110,000)
Greene Bonus = $1,000
Now the total profit required is $123,000 but we only have $115,000, so we will divide $115,000 in their total share i.e. 49,000 : 74,000
Morrison Share = (49,000 / 123,000) * 115,000
= $45,813
Greene Share = (74,000 / 123,000) * 115,000
= $69,187
Case 2
Morrison
Greene
Interest
9,000
(6% * 150,000)
3,000
(6% * 50,000)
Salary Allowance
40,000
70,000
Bonus
-
1,000
Total
49,000
74,000
123,000
(49,000 + 74,000)
Greene Bonus = 20% * (Net Income – Total Salary Allowance)
= 20% * (115,000 – 110,000)
Greene Bonus = $1,000
Profit is $200,000, so remaining profit i.e. $77,000 (200,000 – 123,000) will be divided equally
Morrison Share = 49,000 + (1/2 * 77,000)
= $87,500
Greene Share = 74,000 + (1/2 * 77,000)
= $112,500
Morrison
Greene
Interest
9,000
(6% * 150,000)
3,000
(6% * 50,000)
Salary Allowance
40,000
70,000
Total
49,000
73,000
122,000
(49,000 + 73,000)