Watts and Lyon are forming a partnership. Watts invests $42,000 and Lyon invests $63,000. The partners agree that Watts will work one-third of the total time devoted to the partnership and Lyon will work two-thirds. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $72,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $72,000 per year to Lyon, 10% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $36,000 net loss; Year 2, $90,000 net income; and Year 3, $150,000 net income.
Year 1 Year 2 Year 3 Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered. Watts Lyon Total $ (36,000) 42,000/ 105,000 63,000/ 105,000 0 $ (36,000) $ 0 $ $ 0 Watts Lyon Total $ (36,000) 1/3 2/3 0 $ $ 0 $ 0 Watts Lyon Total $ (36,000) Year 1 Plan (a) Net Income (loss) Balance allocated in proportion to initial investments Balance of income (loss) Shares to the partners Plan (b) Net Income (loss) Balance allocated in proportion to time devoted Balance of income (loss) Shares to the partners Plan (c) Net Income (loss) Salary allowances Balance of income (loss) Balance allocated in proportion to initial investments Balance of income (loss) Shares to the partners Plan (d) Net Income (loss) Salary allowances Balance of income (loss) Interest allowances Balance of income (loss) Balance allocated equally Balance of income (loss) Shares to the partners 0 42,000 1 105,000 63,000/ 105,000 0 $ 0 $ 0 $ 0 $ 0 Watts Lyon Total $ (36,000) 0 0 0 $ 0 $ 0 $ 0 $ 0 Year 1 Year 2 Year 3 Complete the tables, one for each of the first three years, by showing how to allocate partners partners under each of the four plans being considered. Watts Lyon Total $ 90,000 0 $ 90,000 $ 0 $ 0 0 Watts Lyon Total $ 90,000 0 $ $ 0 $ 0 0 Watts Lyon Total Year 2 Plan (a) Net Income (loss) Balance allocated in proportion to initial investments Balance of income (loss) Shares to the partners Plan (b) Net Income (loss) Balance allocated in proportion to time devoted Balance of income (loss) Shares to the partners Plan (c) Net Income (loss) Salary allowances Balance of income (loss) Balance allocated in proportion to initial investments Balance of income (loss) Shares to the partners Plan (d) Net Income (loss) Salary allowances Balance of income (loss) Interest allowances Balance of income (loss) Balance allocated equally Balance of income (loss) $ 90,000 0 0 $ 90,000 $ 0 $ 0 0 Watts Lyon Total $ 90,000 0 0 0 $ 0 Year 1 Year 2 Year 3 Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered. Watts Lyon Total $ 150,000 0 $ 150,000 $ 0 $ 0 0 Watts Lyon Total $ 150,000 0 $ 0 0 $ 0 Watts Lyon Year 3 Plan (a) Net Income (loss) Balance allocated in proportion to initial investments Balance of income (loss) Shares to the partners Plan (b) Net Income (loss) Balance allocated in proportion to time devoted Balance of income (loss) Shares to the partners Plan (c) Net Income (loss) Salary allowances Balance of income (loss) Balance allocated in proportion to initial investments Balance of income (loss) Shares to the partners Plan (d) Net Income (loss) Salary allowances Balance of income (loss) Interest allowances Balance of income (loss) Balance allocated equally Balance of income (loss) Total $ 150,000 0 0 $ 0 $ 0 $ 0 $ 0 Watts Lyon Total $ 150,000 0 0 0 $ 0
