# Original Accounting

Topics: Revenue, Profit, Economic system Pages: 8 (1241 words) Published: December 4, 2012
EXERCISE 13-3

(1)Allocation of \$220,000 of Partnership Income

Cumulative
JohnsonLarsonKragenTotal

Profit and loss percentage1/31/31/3
Salary\$50,000\$60,000\$\$110,000
Bonus (see Note A)20,000130,000
Interest on capital4,0002,50014,500151,000
Balance23,00023,00023,000220,000
Total\$77,000\$85,500\$57,500

Exercise 13-3, Concluded

(2)Allocation of \$34,000 of Partnership Loss
Cumulative
JohnsonLarsonKragenTotal__

Profit and loss percentage1/31/31/3
Salary\$ 50,000\$ 60,000\$\$110,000
Bonus (see Note A)110,000
Interest on capital4,0002,50014,500131,000
Balance(55,000)(55,000)(55,000)(34,000)
Total\$(1,000)\$7,500\$(40,500)

(3)Allocation of \$132,000 of Partnership Income
Cumulative
JohnsonLarsonKragenTotal

Profit and loss percentage1/31/31/3
Salary\$50,000\$60,000\$\$110,000
Bonus (see Note A)12,000122,000
Interest on capital (see Note B)1,9051,1906,905132,000
Balance132,000
Total\$51,905\$61,190\$18,905

Note A: Calculation of Annual Bonus

Bonus when Income Is \$220,000
Bonus = 10% (Net Income – Bonus)
110%Bonus = 10% (\$220,000)
110%Bonus = \$22,000
Bonus = \$20,000

Bonus when Loss Is \$34,000
No bonus is due since there is a loss versus income.

Bonus when Income Is \$132,000
Bonus = 10% (Net Income – Bonus)
110%Bonus = 10% (\$132,000)
110%Bonus = \$13,200
Bonus = \$12,000

Note B: Stated Interest on Capital
Cumulative
JohnsonLarsonKragenTotal

Dollar\$4,000\$2,500\$14,500\$21,000
Percent of total19.05%11.90%69.05%100.00%

Therefore, the remaining profit of \$10,000 should be allocated as interest per the above percentages as follows: \$1,905\$1,190\$6,905\$10,000
EXERCISE 13-5

Allocation of typical profits under the original partnership’s agreement:

Cumulative
CollinsBakerLeboTotal

Salaries\$ 50,000\$ 50,000\$ 50,000\$150,000
Bonus to Baker25,000175,000
Bonus to Collins*80,000255,000
Interest on capital2,00015,000272,000
Remaining profits304,000182,400121,600880,000
Total\$434,000\$259,400\$186,600

*Bonus = 10% (Net Income – Bonus)
110%Bonus = 10% (Net Income)
110%Bonus = \$88,000
Bonus = \$80,000

Exercise 13-5, Concluded

Allocation of assumed profits under the Gordon proposal:

Cumulative
CollinsBakerLeboGordonTotal

Salaries\$50,000\$50,000\$50,000\$50,000\$200,000
Bonus to Baker25,000225,000
Bonus to Gordon330,000555,000
Interest on capital2,00015,000572,000
Subtotal\$50,000\$77,000\$65,000\$380,000

At this point, only \$50,000 of profits has been allocated to Collins. In order for Collins to attain her previous level of allocated profits of \$434,000, the new partnership would need to have \$1,280,000 of remaining profits (\$434,000 – \$50,000 = \$384,000 = 30% of remaining net income). In order for Collins to increase her previous net income by \$60,000, the new partnership would need to have \$1,480,000 of remaining profits.

In conclusion, if Collins were to just maintain her previous level of allocated net income, the new partnership would have to generate net income of \$1,852,000 (\$572,000 + \$1,280,000). For Collins to increase her previously allocated net income by \$60,000, the new partnership would have to generate net income of \$2,152,000. The remaining question is whether or not Gordon can realize such profits from the licensing agreement. Keeping in mind that the...