Question

The partnership agreement of Jones, King, and Lane provides for the annual allocation of the business's profit or loss in the following sequence: Jones, the managing partner, receives a bonus equal to 25 percent of the business’s profit. Each partner receives 20 percent interest on average capital investment. Any residual profit or loss is divided equally. The average capital investments for 2018 were as follows: Jones $ 185,000 King 370,000 Lane 555,000 How much of the $82,000 partnership profit for 2018 should be assigned to each partner?

Answer 1

Bonus to Jones = $82,000 x 25% = $20,500;

Interest on average capital investment:

Jones - $185,000 x 20% = $37,000

King - $370,000 x 20% = $74,000

Lane - $555,000 x 20% = $111,000

Net Loss = $82,000 - $20,500 - $37,000 - $74,000 - $111,000

= -$160,500

Loss to be shared by each partner = $160,500 / 3 = $53,500

Therefore, the following is the partnership profit that should be assigned to each partner:

Jones = $20,500 + $37,000 - $53,500 = $4,000

King = $74,000 - $53,500 = $20,500

Lane = $111,000 - $53,500 = $57,500