Assume the partners in P13.1 want to consider the following methods of allocating WB Company’s profits and losses:

Data from P13.1

Letterman, Leno, and Carson all are partners in the WB Company and have the following amounts of capital: Letterman, $120,000; Leno; $80,000; and Carson, $100,000. The partners currently share all profits and losses equally but are considering allocating profits and losses in a ratio of beginning capital balances.

1. Salary allowances of $20,000 to Letterman and $40,000 to Leno, with any residual allocated equally.

2. Interest of 10 percent on beginning capital balances, with any residual allocated equally.

3. Interest of 10 percent on beginning capital balances; salary allowances of $20,000 to Letterman, $40,000 to Leno, with any residual allocated equally.

Required:

For each of the three alternatives just described, show how the following amounts would be allocated to the partners and determine the projected ending capital balances.

A. Net income of $200,000

B. Net loss of $60,000