Question

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 net income will be allocated as follows: An interest allowance of 6% of each partner's beginning capital balance plus a salary allowance of $40 per hour worked. Any remaining income or loss after calculation of these allowances will be allocated equally. At January 1, 2008, Tom's capital account balance was $15,000 and Mike's was $90,000. During the year ended December 31, 2008, Tom worked 1,800 hours and Mike worked 750 hours.

question:

Calculate each partner's share of net income assuming that net income for the year ended December 31, 2008 is $178,300

Answer 1

Interest on capital of Tom: 15000 x 6% = 900

Interest on capital of Mike = 90000 x 6% = 5400

Salary of Tom = 40 x 1800 = 72000

Salary of Mike = 40 x 750 = 30000

Total net income less interest and salary of partners = 178300 - (900+5400+72000+30000) = 70000

Share of Tom = 68000 x 1/2 = 35000

Share of Mike = 68000 x 1/2 = 35000

Total income of tom = 107900

Total income of mike = 70400

(Assuming that net income given in question in inclusive of interest and salary expense)