(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

Balance— — —132,000

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...