Problem 1- Allocating partnership income and loss; sequential years
Irene Watts and John Lyon are forming a partnership to which Watts will devote one-half 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 $2,000 per month to Lyon and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $2,000 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, $15,000 net loss; year 2, $37,500 net income; and year 3, $62,500 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.)