Chapter 14, Problem 8.1E

To determine

Concept Introduction:

People start their own business and select the form of organization depending upon their need and kind of their business. Partnership is a form of organization. The allocation of profit and loss between the partners is based on the profit-sharing ratio given in the partnership deed and if no priority system is followed then profit and loss will be divided equally.

The average annual profit of the new partnership for accepting the idea of admission by B.

Answer to Problem 8.1E

The required average annual profit to accept the idea of new admission is $\$140,000$ .

Explanation of Solution

The statement for the allocation of income is as below:

Particular	Mr. A	Mr. B	Mr. C	Total
Salaries	$\$30,000$	$\$30,000$	$\$40,000$	$\$100,000$
Bonus to A	$\$12,000$			$\$12,000$
Remaining Profit	$\$10,000$	$\$4,000$	$\$6,000$	$\$20,000$
Income allocation	$\$52,000$	$\$34,000$	$\$46,000$	$\$132,000$

1. Calculation of bonus to A:

Calculation of bonus is as below:

  $\begin{array}{l}\text{Bonus}=\left(\text{Net income - Bonus}\right)\times 10\%\\ \text{Bonus}=\left(\$132,000-\text{Bonus}\right)\times 10\%\\ Bonus\text{ + 10\% of Bonus = \$132,000}\times \text{10\%}\\ \text{110\% Bonus = \$13,200}\\ \text{Bonus = }\frac{\text{\$13,200}}{110\%}\\ \text{Bonus = \$12,000}\end{array}$

2. Calculation of remaining profits and losses is as follows:

Details	Amount ($)	Amount ($)	Amount ($)
Net income	-	-	$132,000$
Less: Partner salaries
Mr. A	$30,000$
Mr. B	$30,000$
Mr. C	$40,000$	$100,000$
Less: Partner’s bonus
Mr. A	$12,000$	$12,000$	$\left(112,000\right)$
			$20,000$

This profit should be allocated between A, B and C in the ratio of $50\%,20\%,\text{ and 30\%}$ .

Mr. R share:

Particular	Mr. A   $\left(50\%\right)$	Mr. B   $\left(20\%\right)$	Mr. C   $\left(30\%\right)$	Total
Remaining profit	$\$10,000$	$\$4,000$	$\$6,000$	$\$20,000$

Alternative $1$

The statement for the allocation of income after admission is as below:

Particular	Mr. A	Mr. B	Mr. C	Mr. D	Total
Salaries	$\$30,000$	$\$30,000$	$\$40,000$	$\$30,000$	$\$130,000$
Bonus to D				$\$20,000$	$\$20,000$
Remaining Profit	$\$42,000$	$\$14,000$	$\$42,000$	$\$42,000$	$\$140,000$
Income allocation	$\$72,000$	$\$44,000$	$\$82,000$	$\$92,000$	$\$290,000$

As per the table drawn above, the remaining allocated to B is $\$14,000$ for $10\%$ share which means the total amount of profit of the partnership should be $\$140,000\left(\frac{\$14,000}{10\%}\right)$ .

Note: Calculation of remaining profits and losses is as follows:

Details	Amount ($)	Amount ($)	Amount ($)
Net income	-	-	$290,000$
Less: Partner salaries
Mr. A	$30,000$
Mr. B	$30,000$
Mr. C	$40,000$
Mr. D	$30,000$	$130,000$
Less: Partner’s bonus
Mr. D	$20,000$	$20,000$	$\left(150,000\right)$
			$140,000$

This profit of $\$140,000$ should be allocated between A, B,C and D in the ratio of $30\%,\text{ 1}0\%,\text{ 30\%, and 30\%}$ .

Mr. R share:

Particular	Mr. A   $\left(30\%\right)$	Mr. B   $\left(10\%\right)$	Mr. C   $\left(30\%\right)$	Mr. D   $\left(30\%\right)$
Remaining profit	$\$42,000$	$\$14,000$	$\$42,000$	$\$42,000$