Question

Rodgers and Winter had capital balances of $60,000 and $90,000, respectively, at the beginning of the current fiscal year. The articles of partnership provide for salary allowances of $25,000 and $30,000, respectively; an allowance of interest at 12% on the capital balances at the beginning of the year; and the remaining net income divided equally. Net income for the current year was $110,000.

a. Present the Division of net income section of the income statement for the current year.
b. Assuming that the net income had been $65,000 instead of $110,000, present the Division of net income section of the income statement for the current year.

Answer 1

Answer and Explanation:

a. The division of net income section for the current year is shown below:

Particulars   Rodgers      Winter       Total    

Salary allowance $25,000        $30,000     $55,000    

Interest allowance $7,200        $10,800     $18,000    

Remaining income $18,500        $18,500     $37,000    

Net income         $50,700        $59,300      $110,000

Working note:

As we know that

Interest allowance = 12% of capital balance    

Rodgers $60,000 × 12% = $7,200    

Winter $90,000 ×  12%  = $10,800    

And, the Remaining income = Net income - (salary allowance + interest allowance)  

Total = $110,000 - ($55,000 + $18,000)    

= $110,000 - $73,000      

= $37,000      

This $370,00 is divided equally in both divisions.    

Therefore, the Net income is

= Salary allowance + interest allowance + remaining income  

b. The division of net income section for the current year is shown below:

Particulars   Rodgers      Winter       Total    

Salary allowance $25,000        $30,000     $55,000    

Interest allowance $7,200        $10,800     $18,000      

Total          $32,200        $40,800      $73,000    

Excess of allowance

over net income -$4,000        -$4,000      -$8,000    

Net income         $28,200        $36,800      $65,000    

Working note:    

Excess of allowance over net income = Net income - Total allowances  

Total   =  $65000 - $73,000      

= -$8,000

This -$8,000 is divided equally between the both divisions