Question

Sally and Samantha have decided to form a partnership. They have agreed that Sally is to invest $195,000 and that Samantha is to invest $65,000. Sally is to devote one-half time to the business, and Samantha is to devote full time. The following plans for the division of income are being considered: a. Equal division. b. In the ratio of original investments. c. In the ratio of time devoted to the business. d. Interest of 5% on original investments and the remainder equally e. Interest of 5% on original investments, salary allowances of $50,000 to Sally and $85,000 to Samantha, and the remainder equally f. Plan (e), except that Samantha is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances Instructions: Determine the division of Net Income of $235,000.

Answer 1

Answer/Explanation:

a. Equal division.

$235,000 / 2 = $117,500.

b. In the ratio of original investments.

For Samantha = 65,000 / (65000+195000) * 100 = 25%;

25% of $235,000= $58,750.

For Sally = 195,000 / (65000+195000) * 100 = 75%;

75% of $235,000= $176,250

c. In the ratio of time devoted to the business.

For Sally = 1 x $235,000 = $235,000

For Samantha= 1/2 x $235,000.

d. Interest of 5% on original investments and the remainder equally.

Interest

For Sally= 5% of $195,000 = $9,750

For Samantha= 5% of $65,000 = $3,250.

The remainder= 235,000 - 3,250 + 9750 = $222,000/2= $111,000 equally.

e. Interest of 5% on original investments, salary allowances of $50,000 to Sally and $85,000 to Samantha, and the remainder equally

Interest

For Sally= 5% of $195,000 = $9,750

For Samantha= 5% of $65,000 = $3,250.

The remainder= 235,000 - (9750+50000+3250+85000)= $87,000

(g), except that Samantha is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances

Total salary allowances= $85,000+$65,000=$150,000;

Net income exceeds value by $235,000-$150,000= $85,000

Therefore, 20% of 85,000 = $8,500 as bonus.