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 as specified in the partnership agreement . If there is no agreement, income and losses are divided equally . Feedback Check My Work Most partnerships specify how income or losses are to be divided. Income or losses of a partnership are divided equally if no partnership agreement exists. 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 $202,790 for its first full year. The partnership agreement provides for the following division of income: Monthly Salary Allowance I.M. Withhim $6,190 H.E. Swithme $5,470 2. Interest of 9% on each partners January 1 Capital balance. Capital, I.M. Withhim, January 1 $232,500 2. Interest of 9% on each partners January 1 Capital balance. Capital, I.M. Withhim, January 1 $232,500 Capital, H.E. Swithme, January 1 $150,500 3. Remaining Net Income Divided Equally Based on this agreement, how would annual net income of $202,790 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 Feedback Check My Work Set up a column for each partner and a total column. Show each partner's salary allowance. Then add interest allowance on each partner's capital account (capital balance times interest rate). Take the remainder (net income minus salary allowance minus total interest allowance) times the income sharing ratio to determine the remaining income distributed to each partner. 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. 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. Income Summary I.M. Withhim, capital H.E Swithme, capital 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 $13,000 Jeckyl 2. Interest of 6% on each partners January 1 Capital balance. Capital, Heckyl, January 1 $400,000 Capital, Jeckyl, January 1 $260,000 Click here and use the sliders to select the profit and loss sharing ratio and partnership net income to answer the following questions: The partnership net income for the first year is $500,000, and Heckyl and Jeckyl distribute any remaining net income in the following ratio: 1. - 40% to Heckyl, 60% to Jeckyl. 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 Click here and use the sliders to select the profit and loss sharing ratio and partnership net income to answer the following questions: 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? $ under this scenario than it would be if the remaining partnership net The distribution of net income to Heckyl will be stay the same X 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: 79% to Heckyl. 39% to leckyl. b. How much net income should be distributed to Jeckyl? The distribution of net income to Heckyl will be stay the same X under this scenario than it would be if the remaining partnership net income was distributed equally between the partners. 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? under this scenario than it would be if the remaining partnership net income The distribution of net income to Jeckyl will be lower was distributed equally between the partners. Feedback Check My Work Use the sliders to change the profit and loss sharing ratio and the total partnership net income. Set up a column for each partner and a total column. Show each partner's salary allowance. Then add interest allowance on each partner's capital account (capital balance times interest rate). Take the remainder (net income minus salary allowance minus total interest allowance) times the income sharing ratio to determine the remaining income distributed to each partner
