Problem 12-2A Allocating partnership income and loss; sequential years LO P2

Irene Watts and John Lyon are forming a partnership to which Watts will devote one-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 $32,000 for Watts and $48,000 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, 8% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: year 1, $14,000 net loss; year 2, $35,000 net income; and year 3, $58,333 net income.

Complete this question by entering your answers in the tabs below.

Year 1

Year 2

Year 3

Year 1 Plan (a) Watts Lyon Total Net Income (loss) $(14,000) Balance allocated in proportion to initial investments 1/3 32,000 1/3 48,000 80,000 Balance of income (loss) $(94,000) Shares to the partners $32,000 $48,000 $80,000 Plan (b) Watts Lyon Total Net Income (loss) $(14,000) Balance allocated in proportion to time devoted 0 Balance of income (loss) Shares to the partners $0 $0 $0 Plan (c) Watts Lyon Total Net Income (loss) $(14,000) Salary allowances 0 Balance of income (loss) Balance allocated in proportion to initial investments 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0 Plan (d) Watts Lyon Total Net Income (loss) $(14,000) Salary allowances 0 Balance of income (loss) Interest allowances 0 Balance of income (loss) Balance allocated equally 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0 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. Year 2 Plan (a) Watts Lyon Total Net Income (loss) $35,000 Balance allocated in proportion to initial investments 0 Balance of income (loss) $35,000 Shares to the partners $0 $0 $0 Plan (b) Watts Lyon Total Net Income (loss) $35,000 Balance allocated in proportion to time devoted 0 Balance of income (loss) Shares to the partners $0 $0 $0 Plan (c) Watts Lyon Total Net Income (loss) $35,000 Salary allowances 0 Balance of income (loss) Balance allocated in proportion to initial investments 0 Balance of income (loss) $35,000 Shares of the partners $0 $0 $0 Plan (d) Watts Lyon Total Net Income (loss) $35,000 Salary allowances 0 Balance of income (loss) Interest allowances 0 Balance of income (loss) Balance allocated equally 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0

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.

Year 3 Plan (a) Watts Lyon Total Net Income (loss) $58,333 Balance allocated in proportion to initial investments 0 Balance of income (loss) $58,333 Shares to the partners $0 $0 $0 Plan (b) Watts Lyon Total Net Income (loss) $58,333 Balance allocated in proportion to time devoted 0 Balance of income (loss) Shares to the partners $0 $0 $0 Plan (c) Watts Lyon Total Net Income (loss) $58,333 Salary allowances 0 Balance of income (loss) Balance allocated in proportion to initial investments 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0 Plan (d) Watts Lyon Total Net Income (loss) $58,333 Salary allowances 0 Balance of income (loss) Interest allowances 0 Balance of income (loss) Balance allocated equally 0 Balance of income (loss) $0 Shares of the partners $0 $0 $0