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Dividing Partnership Net Income

Phil LaRue and Russ Small have decided to form a partnership. They have agreed that LaRue is to invest $16,000 and Small $24,000. LaRue is to devote full-time to the business and Small one half time. The following plans for division of income are being considered:
a. Equal division
b. In the ratio of original investments
c. In the ratio of time being devoted to the business
d. Interest of 10% on original investments and the remainder in the ratio of 3:2
e. Interest of 10% on original investments, salary allowances of $30,000 to LaRue and $15,000 to Small, and the remainder equally.
f. Plan (e) except that LaRue is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the salary allowances.
For each plan, determine the division of net income under each of the following assumptions: (1) net income of $135,000 and (2) net income of $60,000.

Complete calculations are shown for each plan using a net income of $135,000. A checking answer is given for each plan using a net income of $60,000.

Solution Preview

Complete calculations are shown for each plan using (1) net income of $135,000 and a checking answer is given for each plan using (2) net income of $60,000.

The attached MS Word document also contains the problem solutions.

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Solutions:
a 1. Equal division 135,000 / 2 = $67,500 each a 2. $30,000 each
b 1. Ratio of original investment
LaRue $16,000 + Small $24,000 = Total $40,000
LaRue = $16,000 / $40,000 = 40% or 2/5 Small = $24,000 / $40,000 = 60% ...

Solution Summary

This solution is comprised of a detailed explanation along with calculations of how to determine what share of the net income each partner will receive. The following methods for sharing the net income are illustrated:
a. Equal division.
b. Ratio of original investments.
c. Ratio of time being devoted to the business.
d. Interest on original investments and the remainder as a ratio.
e. Interest on original investments, salary allowances, and the remainder equally.
f. Interest on original investments, salary allowances, bonus allowance, and the remainder equally.

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