12.2

Activation Exercise 12-2: Dividing Partnership Net Income by Services of Partners

Terms and Definitions

The income of a partnership is divided among the partners each period. The income or losses of the partnership are divided - Select your answer -as specified by lawas specified in the partnership agreement. If there is no agreement, income and losses are divided - Select your answer -according to the relative size of each partner's initial capital contributionequally.

Understanding the Business Transaction

A partnership agreement may divide income based upon (1) salary allowances, or (2) salary allowances and interest on capital balances of each partner. The amounts of the distributions reflect differences in partners abilities and time devoted to the partnership.

The partnership of I.M. Withhim and H.E. Swithme earned $215,480 for its first full year. The partnership agreement provides for the following division of income:

1.		Monthly Salary Allowance
	I.M. Withhim	$6,290
	H.E. Swithme	$5,510

2.	Interest of 12% on each partners January 1 Capital balance.

Capital, I.M. Withhim, January 1	$224,500
Capital, H.E. Swithme, January 1	$164,500

3.

Remaining Net Income

Divided Equally

Based on this agreement, how would annual net income of $215,480 be distributed between the partners?

	I.M. Withhim	H.E. Swithme	Total
Annual salary allowance (mo. X 12)	$	$	$
Interest Allowance	$	$	$
Remaining income	$	$	$
Division of Net income	$	$	$

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Recording in the Accounting System

Using the data above, prepare the journal entry for closing Income Summary and dividing net income between the partners' captial accounts.

If an amount box does not require an entry, leave it blank.

Financial Statement Impact

The partnership of Heckyl and Jeckyl began operations on January 1 of the current year. The partnership agreement provides for the following division of income:

1.		Monthly Salary Allowance
	Heckyl	$12,000
	Jeckyl	$13,000

2.	Interest of 6% on each partners January 1 Capital balance.

	Capital, Heckyl, January 1	$400,000
	Capital, Jeckyl, January 1	$260,000

Use the sliders to select the profit and loss sharing ratio and partnership net income to answer the following questions:

1.	The partnership net income for the first year is $500,000, and Heckyl and Jeckyl distribute any remaining net income in the following ratio: 40% to Heckyl, 60% to Jeckyl.

a.	How much net income should be distributed to Heckyl?
	$

b.	How much net income should be distributed to Jeckyl?
	$

c.	The distribution of net income to Heckyl will be - Select your answer -higherlowerstay the same under this scenario than it would be if the remaining partnership net income was distributed equally between the partners.

2.	The partnership net income for the first year is $650,000, and Heckyl and Jeckyl distribute any remaining net income in the following ratio: 70% to Heckyl, 30% to Jeckyl.

a.	How much net income should be distributed to Heckyl?
	$

b.	How much net income should be distributed to Jeckyl?
	$

c.	The distribution of net income to Jeckyl will be - Select your answer -higherlowerstay the same under this scenario than it would be if the remaining partnership net income was distributed equally between the partners.