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