Question

Income allocation in a partnershipKramer and Knox began a partnership by investing $60,000 and $80,000, respectively. During its first year, the partnershipearned $160,000. Prepare calculations showing how the $160,000 income should be allocated to the partners under eachof the following three separate plans for sharing income and loss:(1) the partners failed to agree on a method to share income; (2) the partners agreed to share income and loss inproportion to their initial investments (round amounts to the nearest dollar); and (3) the partners agreed to share incomeby granting a $50,000 per year salary allowance to Kramer, a $40,000 per year salary allowance to Knox, 10% interest ontheir initial capital investments, and the remaining balance shared equally.

Answer 1

Answer:

1. $68,571 on Kramer and $91,429 on Knox

2. $68,571 on Kramer and $91,429 on Knox

3. $84,000 on Kramer and $76,000 on Knox

Explanation:

1. In absence of the agreement on how the profit or loss will be allocated, we will use the ration based on the capital balances of the partners.  

Kramer $60,000  

Knox $80,000  

Total  $140,000  

 

The allocation would be:  

Kramer $160,000 x (60,000/140,000) = $68,571  

Knox $160,000 x (80,000/140,000) = $91,429  

 

2. The partners agreed to divide profit based on the initial investment of the partners.  

Kramer $60,000  

Knox $80,000  

Total  $140,000  

 

The allocation would be:  

Kramer $160,000 x (60,000/140,000) = $68,571  

Knox $160,000 x (80,000/140,000) = $91,429

3. The partners agrred to allocate the profit based on the salaries given to the partners, 10% interest and divide the excess equally.  

        Kramer   Knor  Total

Salary  50,000   40,000   90,000

Interest  6,000   8,000   14,000

Excess  28,000   28,000   56,000

TOTAL  84,000  76,000   160,000

Interest

Kramer $60,000 x 10% = $6,000

Knox $80,000 x 10% = $8,000