Question

Dividing Partnership Income

Candace Hassell and Abby Lawson formed a partnership, investing $261,000 and $87,000, respectively.

Determine their participation in the year's net income of $372,000, under each of the following independent assumptions.

a. No agreement concerning division of net income.

b. Divided in the ratio of original capital investment.

c. Interest at the rate of 12% allowed on original investments and the remainder divided in the ratio of 2:3.

d. Salary allowances of $55,000 and $77,000, respectively, and the balance divided equally.

e. Allowance of interest at the rate of 12% on original investments, salary allowances of $55,000 and $77,000, respectively, and the remainder divided equally.

	Hassell	Lawson
a
b
c
d
e

Answer 1

Solution:

a) When agreement concerning division of net income exists, income is divided equally.

Income to Candace Hassell = $372,000/2 = $186,000

Income to Abby Lawson = $372,000/2 = $186,000

b) Ratio of Original Capital Investment

= [$261,000/ ($261,000 + $87,000)] : [$87,000/ ($261,000 + $787000)]

= 3:1

Income to Candace Hassell = $372,000 * (3/4) = $279,000

Income to Abby Lawson = $372,000 * (1/4) = $93,000

c) Interest to Candace Hassell = $261,000 * 12% = $31,320

Interest to Abby Lawson = $87,000 * 12% = $10,440

Balance Income = $372,000 - $31,320 - $10,440 = $330,240

Income to Candace Hassell = $31,320 + [$330,240 * (2/5)]

= $31,320 + $132,096

= $163,416

Income to Abby Lawson = $10,440 + [$330,240 * (3/5)

= $10,440 + $198,144

= $208,584.

d.) Balance Income = $372,000 - $55,000 - $77,000 = $240,000

Income to Candace Hassell = $55,000 + [$240,000/2]

= $55,000 + $120,000

= $175,000

Income to Abby Lawson = $77,000 + [$240,000/2]

= $77,000 + $120,000

= $197,000.

e) Interest to Candace Hassell = $261,000 * 12% = $31,320

Interest to Abby Lawson = $87,000 * 12% = $10,440

Balance Income = $372,000 - $31,320 - $10,440 - $55,000 - $77,000 = $198,240

Income to Candace Hassell = $31,320 + $55,000 + [$198,240/2]

= $31,320 + $55,000 + $99,120

= $185,440

Income to Abby Lawson = $10,440 + $77,000 + [$198,240/2]

= $10,440 + $77,000 + $99,120

= $186,560