Alex and Blen began a partnership (AB Partnership) by investing Br.78,000 and Br.52,000
cash respectively. During its first year of operation, the partnership earned net income of
Br.60,000.
Required:
A.Prepare computations that show how the income should be allocated to the partners under
each of the following income sharing plans.
i.The partnership agreement remained silent concerning income sharing method.
ii.The partners agree to share income in the ratio of original capital investments
iii.The partners agree to share income by allowing first yearly salary of Br.12,000 to Blen
and Br.18,000 to Alex, then 10% interest on original capital balance of each partner
and, finally, the remainder equally.
B.Assume that AB Partnership incurred Br.20,000 loss during its second year of operation.
Determine the participation of Alex and Blen in this loss according to each of the three
income-sharing assumptions listed in "a" above.
A.
i. Since the partnership agreement is silent concerning income sharing method, the income will be divided equally between the partners.
Income allocated to Alex = Br.60,000/2 = Br.30,000
Income allocated to Blen = Br.60,000/2 = Br.30,000
ii. The partners agree to share income in the ratio of original capital investments.
Total original capital investment = Br.78,000 + Br.52,000 = Br.130,000
Alex's share = (Br.78,000/Br.130,000) * Br.60,000 = Br.36,000
Blen's share = (Br.52,000/Br.130,000) * Br.60,000 = Br.24,000
iii. The partners agree to share income by allowing first yearly salary, then 10% interest on original capital balance, and finally, the remainder equally.
First yearly salary to Blen = Br.12,000
First yearly salary to Alex = Br.18,000
Interest on Alex's original capital = (Br.78,000/100) * 10% = Br.7,800
Interest on Blen's original capital = (Br.52,000/100) * 10% = Br.5,200
Remaining income = Br.60,000 - (Br.12,000 + Br.18,000 + Br.7,800 + Br.5,200) = Br.17,000
Income allocated equally to Alex and Blen = Br.17,000/2 = Br.8,500
Total income allocated to Blen = Br.12,000 + Br.5,200 + Br.8,500 = Br.25,700
Total income allocated to Alex = Br.18,000 + Br.7,800 + Br.8,500 = Br.34,300
B.
i. Since the partnership agreement is silent concerning loss sharing method, the loss will be divided equally between the partners.
Loss allocated to Alex = Br.20,000/2 = Br.10,000
Loss allocated to Blen = Br.20,000/2 = Br.10,000
ii. The partners agree to share income in the ratio of original capital investments.
Alex's share = (Br.78,000/Br.130,000) * Br.20,000 = Br.12,000
Blen's share = (Br.52,000/Br.130,000) * Br.20,000 = Br.8,000
iii. The partners agree to share income by allowing first yearly salary, then 10% interest on original capital balance, and finally, the remainder equally.
First yearly salary to Blen = Br.12,000
First yearly salary to Alex = Br.18,000
Interest on Alex's original capital = (Br.78,000/100) * 10% = Br.7,800
Interest on Blen's original capital = (Br.52,000/100) * 10% = Br.5,200
Remaining loss = Br.20,000 - (Br.12,000 + Br.18,000 + Br.7,800 + Br.5,200) = Br.-22,000 (negative value means a loss)
Loss allocated equally to Alex and Blen = Br.-22,000/2 = Br.-11,000
Total loss allocated to Blen = Br.12,000 + Br.5,200 - Br.-11,000 = Br.6,200
Total loss allocated to Alex = Br.18,000 + Br.7,800 - Br.-11,000 = Br.16,200 (negative value indicates that Alex does not participate in the loss)