Answer:
<h2>Irene Watts and John Lyon</h2>
<h3>Allocation of Partnership Income or Loss under these plans:</h3>
(a) in the ratio of their initial capital investments, which they have agreed will be $42,000 for Watts and $63,000 for Lyon:
Year 1 Year 2 Year 3
Net Income / (Loss) ($36,000) $90,000 $150,000
Watts 40% (14,400) 36,000 60,000
Lyon 60% (21,600) 54,000 90,000
(b) in proportion to the time devoted to the business:
Year 1 Year 2 Year 3
Net Income / (Loss) ($36,000) $90,000 $150,000
Watts 1/3 (12,000) 30,000 50,000
Lyon 2/3 (24,000) 60,000 100,000
(c) a salary allowance of $6,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments:
Year 1 Year 2 Year 3
Net Income / (Loss) ($36,000) $90,000 $150,000
Less Salary (72,000) (72,000) (72,000)
Distributable Income/(Loss) (108,000) $18,000 $78,000
Watts 40% ($43,200) $7,200 $31,200
Lyon:
Salary 72,000 72,000 72,000
Distributable 60% (64,800) 10,800 46,800
Net share $7,200 $82,800 $118,800
(d) a salary allowance of $6,000 per month to Lyon, 10% interest on their initial capital investments, and the balance shared equally:
Year 1 Year 2 Year 3
Net Income / (Loss) ($36,000) $90,000 $150,000
Less Salary (72,000) (72,000) (72,000)
Less Interest on Capital (10,500) (10,500) (10,500)
Distributable Income/(Loss) (118,500) 7,500 67,500
Watts:
Interest on Capital 4,200 4,200 4,200
Distributable income 40% (47,400) 3,000 27,000
Share of profit or loss ($45,400) $7,200 $31,200
Lyon:
Salary 72,000 72,000 72,000
Interest on Capital 6,300 6,300 6,300
Income/Loss 60% (71,100) 4,500 40,500
Net share $7,200 $82,800 $118,800
Explanation:
a) Data and Calculations:
Net Income of Loss:
Year 1 = $36,000 loss
Year 2 = $90,000
Year 3 = $150,000
Sharing plans:
a) Capital:
Watts $42,000 = $42,000/$105,000 = 40%
Lyon $63,000 = $63,000/$105,000 = 60%
b) Time devotion:
Watts 1 = 1/3 or 33%
Lyon 2 = 2/3 or 67%
c) a salary allowance of $6,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments:
Distributable Income / Loss:
Year 1 = ($36,000) - $72,000 = ($108,000)
Year 2 = $90,000 - $72,000 = $18,000
Year 3 = $150,000 - $72,000 = $78,000
