Question

Partners Sherif and Rafik receive a yearly salary of $100,000 and $120,000, respectively, plus interest of 4 percent on weighted average capital. Partnership income for the year, before any distributions to partners, is $300,000. Weighted average capital balances for Sherif and Rafik are $525,000 and $425,000, respectively. Assume full implementation.

Required

Calculate the bonus for the year, in each of the following situations:

a. Sherif gets a bonus of 20 percent of partnership income before distributions.

$Answer

b. Rafik gets a bonus of 20 percent of partnership income after salaries and interest.

$Answer

c. Sherif gets a bonus of 20 percent of partnership income after salaries, interest, and his bonus.

$Answer

Answer 1

Solution a:

Bonus to Sherif =Partnership income before distribution * 20% = $300,000*20% = $60,000

Solution b:

Total salaries to partners = $100,000 + $120,000 = $220,000

Interest on capital to partners = ($525,000 + $425,000) * 4% = $38,000

Partnership income after salaries and interest = $300,000 - $220,000 - $38,000 = $42,000

Bonus to Rafik = $42,000*20% = $8,400

Solution c:

Partnership income after salaries and interest = $300,000 - $220,000 - $38,000 = $42,000

Bonus to Sherif = $42,000*20/120 = $7,000