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 20 percent of the business’s profit. Each partner receives 15 percent interest on average capital investment. Any residual profit or loss is divided equally. The average capital investments for 2018 were as follows: Jones $ 100,000 King 200,000 Lane 300,000 How much of the $90,000 partnership profit for 2018 should be assigned to each partner?

Answer 1

Answer:

Mr. J = $27,000

Mr. K = $24,000

Mr. L = $39,000

Explanation:

Partnership for the year 2018 = $90,000

Profit/(Loss) to be distributed:

= Partnership for the year 2018 - Bonus to Mr. J - Interest on average capital investment

= $90,000 - [20% × $90,000] - {(15% × $100,000) + (15% × $200,000) + (15% × $300,000)}

= $90,000 - $18,000 - [$15,000 + $30,000 + $45,000]

= ($18,000) ⇒ Loss

Loss to be allocated to each partner = ($18,000) ÷ 3

                                                             = ($6,000)

Therefore, the profit of $90,000 should be assigned to each partner is as follows:

Mr. J = $18,000 + $15,000 + ($6,000)

        = $27,000

Mr. K = $30,000 + ($6,000)

         = $24,000

Mr. L = $45,000 + ($6,000)

        = $39,000