Question

Dylan Howell and Demond Nickles have decided to form a partnership. They have agreed that Howell is to invest $50,000 and that Nickles is to invest $75,000. Howell is to devote full time to the business, and Nickles is to devote one-half time. The following plans for the division of income are being considered:

Equal division.
In the ratio of original investments.
In the ratio of time devoted to the business.
Interest of 10% on original investments and the remainder in the ratio of 3:2.
Interest of 10% on original investments, salary allowances of $38,000 to Howell and $19,000 to Nickles, and the remainder equally.
Plan (e), except that Howell is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances.
Required:

For each plan, determine the division of the net income under each of the following assumptions: (1) net income of $420,000 and (2) net income of $150,000.

Answer 1

For the equal division plan, both partners receive an equal share of the net income. In the ratio of original investments plan, the net income is divided proportionally to the partners' investments. In the ratio of time devoted to the business plan, the net income is divided based on the partners' time commitment.

Step-by-step explanation:

Equal division:

Under this plan, Dylan and Demond will split the net income equally, regardless of their investments or time spent on the business. For a net income of $420,000, each partner would receive $210,000. For a net income of $150,000, each partner would receive $75,000.

The ratio of original investments:

With this plan, the net income is divided in proportion to each partner's initial investment. Dylan invested $50,000 and Demond invested $75,000, so the ratio is 2:3. For a net income of $420,000, Dylan would receive $140,000 and Demond would receive $280,000. For a net income of $150,000, Dylan would receive $50,000 and Demond would receive $100,000.

The ratio of time devoted to the business:

With this plan, the net income is divided based on the time each partner spends on the business. Dylan devotes full-time, while Demond devotes half time. This means the ratio is 2:1. For a net income of $420,000, Dylan would receive $280,000 and Demond would receive $140,000. For a net income of $150,000, Dylan would receive $100,000 and Demond would receive $50,000.