Irene Watts and John Lyon are forming a partnership to which Watts will devote three-fourth time and Lyon will devote full time. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments, which they have agreed will be $28,000 for Watts and $52,000 for Lyon; (b) in proportion to the time devoted to the business; (c) a salary allowance of $1,750 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $1,750 per month to Lyon, 11% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $16,000 net loss; year 2, $40,000 net income; and year 3, $66,667 net income.

Required:

Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of the four plans being considered. (Amounts to be deducted should be indicated with a minus sign. Do not round intermediate calculations.)

Year 1 Plan (a) Watts Lyon Total Net Income (loss) $(16,000) Balance allocated in proportion to initial investments 28000/80000 52000/80000 0 Balance of income (loss) $(16,000) Shares to the partners $0 $0 $0 Plan (b) Watts Lyon Total Net Income (loss) $(16,000) Balance allocated in proportion to time devoted 1,750 1,750 Balance of income (loss) $(17,750) Shares to the partners $0 $1,750 $1,750 Plan (c) Watts Lyon Total Net Income (loss) $(16,000) Salary allowances $1,750 1,750 Balance of income (loss) Balance allocated in proportion to initial investments 28000/80000 52000/80000 1,750 1,750 Balance of income (loss) $(1,750) Shares of the partners $0 $3,500 $3,500 Plan (d) Watts Lyon Total Net Income (loss) $(16,000) Salary allowances $1,750 1,750 Balance of income (loss) Interest allowances $1,750 1,750 Balance of income (loss) Balance allocated equally 1,750 1,750 Balance of income (loss) $(1,750) Shares of the partners $0 $5,250 $5,250

Year 2 Plan (a) Watts Lyon Total Net Income (loss) $40,000 Balance allocated in proportion to initial investments 28000/80000 52000/80000 1,750 1,750 Balance of income (loss) $38,250 Shares to the partners $0 $1,750 $1,750 Plan (b) Watts Lyon Total Net Income (loss) $40,000 Balance allocated in proportion to time devoted 1/3 2/3 1,750 1,750 Balance of income (loss) $38,250 Shares to the partners $0 $1,750 $1,750 Plan (c) Watts Lyon Total Net Income (loss) $40,000 Salary allowances $1,750 1,750 Balance of income (loss) Balance allocated in proportion to initial investments 28000/80000 52000/80000 1,750 1,750 Balance of income (loss) $36,500 Shares of the partners $0 $3,500 $3,500 Plan (d) Watts Lyon Total Net Income (loss) $40,000 Salary allowances $1,750 1,750 Balance of income (loss) Interest allowances $1,750 1,750 Balance of income (loss) Balance allocated equally 1,750 1,750 Balance of income (loss) $(1,750) Shares of the partners $0 $5,250 $5,250 Year 2 Plan (a) Watts Lyon Total Net Income (loss) $40,000 Balance allocated in proportion to initial investments 28000/80000 52000/80000 1,750 1,750 Balance of income (loss) $38,250 Shares to the partners $0 $1,750 $1,750 Plan (b) Watts Lyon Total Net Income (loss) $40,000 Balance allocated in proportion to time devoted 1/3 2/3 1,750 1,750 Balance of income (loss) $38,250 Shares to the partners $0 $1,750 $1,750 Plan (c) Watts Lyon Total Net Income (loss) $40,000 Salary allowances $1,750 1,750 Balance of income (loss) Balance allocated in proportion to initial investments 28000/80000 52000/80000 1,750 1,750 Balance of income (loss) $36,500 Shares of the partners $0 $3,500 $3,500 Plan (d) Watts Lyon Total Net Income (loss) $40,000 Salary allowances $1,750 1,750 Balance of income (loss) Interest allowances $1,750 1,750 Balance of income (loss) Balance allocated equally 1,750 1,750 Balance of income (loss) $(1,750) Shares of the partners $0 $5,250 $5,250

Year 3 Plan (a) Watts Lyon Total Net Income (loss) $66,667 Balance allocated in proportion to initial investments 28000/80000 52000/80000 1,750 1,750 Balance of income (loss) $64,917 Shares to the partners $0 $1,750 $1,750 Plan (b) Watts Lyon Total Net Income (loss) $66,667 Balance allocated in proportion to time devoted 1/3 2/3 1,750 1,750 Balance of income (loss) $64,917 Shares to the partners $0 $1,750 $1,750 Plan (c) Watts Lyon Total Net Income (loss) $66,667 Salary allowances $1,750 1,750 Balance of income (loss) Balance allocated in proportion to initial investments 28000/80000 52000/80000 1,750 1,750 Balance of income (loss) $(1,750) Shares of the partners $0 $3,500 $3,500 Plan (d) Watts Lyon Total Net Income (loss) $66,667 Salary allowances $1,750 1,750 Balance of income (loss) Interest allowances $1,750 1,750 Balance of income (loss) Balance allocated equally 1,750 1,750 Balance of income (loss) $(1,750) Shares of the partners $0 $5,250 $5,250