Dividing Partnership Income Morrison and Greene have decided

Dividing Partnership Income Morrison and Greene have decided to form a partnership. They have agreed that Morrison is to invest $150,000 and that Greene is to invest $50,000. Morrison is to devate one-half time to the business, and Greene 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 6% on original investments and the remainder equal e. Interest of 6% on original investments, salary allowances of $40,000 to Morrison and $70,000 to Greene, and the remainder equally a exceeds the Required: For each plan, determine the division of the net income under each of the following assumptions: (1) net income of $115,000 and (2) net income of $200,000. Round answers to the nearest whole dollar (13 $200,000 Plan Morrison Greene Morrison Greene 1.

Solution

Answer

a.

Ratio = 1:1

Case 1

Morrison Share = ½*115,000

= $57,500

Greene Share = ½*115,000

= $57,500

Case 2

Morrison Share = ½ *200,000

= $100,000

Greene Share = ½*200,000

= $100,000

b.

Ratio = Morrison : Greene

$150,000 : $50,000

Ratio = 3:1

Case 1

Morrison Share = 3/4 * 115,000

= $86,250

Greene Share = 1/4 *115,000

= $28,750

Case 2

Morrison Share = 3/4 * 200,000

= $150,000

Greene Share = 1/4 *200,000

= $150,000

c.

Ratio = Morrison : Greene

0.5 : 1

Ratio = 0.5 : 1

Case 1

Morrison Share = 0.5/1.5 * 115,000

= $38,333

Greene Share = 1/1.5 *115,000

= $76,667

Case 2

Morrison Share = 0.5/1.5 * 200,000

= $66,667

Greene Share = 1/1.5 *200,000

= $133,333

d.

Morrison Interest = 6% * 150,000 = $9,000

Greene Interest = 6% * 50,000 = $3,000

It is mentioned that profit after interest will be divided equally

Case 1

Profit after Interest = 115,000 – (9,000 + 3,000)

= 103,000

Partner Share = Interest + Profit Share

Morrison Share = 9,000 + (1/2 * 103,000)

= $60,500

Greene Share = 3,000 + (1/2 * 103,000)

= $54,500

Case 2

Profit after Interest = 200,000 – (9,000 + 3,000)

= 188,000

Partner Share = Interest + Profit Share

Morrison Share = 9,000 + (1/2 * 188,000)

= $103,000

Greene Share = 3,000 + (1/2 * 188,000)

= $97,000

e.

Case 1

Morrison

Greene

Interest

9,000

(6% * 150,000)

3,000

(6% * 50,000)

Salary Allowance

40,000

70,000

Total

49,000

73,000

122,000

(49,000 + 73,000)

Now the total profit required is $122,000 but we only have $115,000, so we will divide $115,000 in their total share i.e. 49,000 : 73,000

Morrison Share = (49,000 / 122,000) * 115,000

= $46,188.52

Greene Share = (73,000 / 122,000) * 115,000

= $68,811.48

Case 2

Morrison

Greene

Interest

9,000

(6% * 150,000)

3,000

(6% * 50,000)

Salary Allowance

40,000

70,000

Total

49,000

73,000

122,000

(49,000 + 73,000)

Profit is $200,000, so remaining profit i.e. $78,000 (200,000 – 122,000) will be divided equally

Morrison Share = 49,000 + (1/2 * 78,000)

= $88,000

Greene Share = 73,000 + (1/2 * 78,000)

= $112,000

f.

Case 1

Morrison

Greene

Interest

9,000

(6% * 150,000)

3,000

(6% * 50,000)

Salary Allowance

40,000

70,000

Bonus

-

1,000

Total

49,000

74,000

123,000

(49,000 + 74,000)

Greene Bonus = 20% * (Net Income – Total Salary Allowance)

= 20% * (115,000 – 110,000)

Greene Bonus = $1,000

Now the total profit required is $123,000 but we only have $115,000, so we will divide $115,000 in their total share i.e. 49,000 : 74,000

Morrison Share = (49,000 / 123,000) * 115,000

= $45,813

Greene Share = (74,000 / 123,000) * 115,000

= $69,187

Case 2

Morrison

Greene

Interest

9,000

(6% * 150,000)

3,000

(6% * 50,000)

Salary Allowance

40,000

70,000

Bonus

-

1,000

Total

49,000

74,000

123,000

(49,000 + 74,000)

Greene Bonus = 20% * (Net Income – Total Salary Allowance)

= 20% * (115,000 – 110,000)

Greene Bonus = $1,000

Profit is $200,000, so remaining profit i.e. $77,000 (200,000 – 123,000) will be divided equally

Morrison Share = 49,000 + (1/2 * 77,000)

= $87,500

Greene Share = 74,000 + (1/2 * 77,000)

= $112,500

	Morrison	Greene
Interest	9,000 (6% * 150,000)	3,000 (6% * 50,000)
Salary Allowance	40,000	70,000
Total	49,000	73,000
		122,000 (49,000 + 73,000)