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Dividing Partnership Net Income

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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.

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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.

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% ...

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