PE 12-2A Dividing partnership net income

Cody Paulson and Hannah O’Brien formed a partnership, dividing income as follows:
1. Annual salary allowance to Paulson of $26,000.
2. Interest of 5% on each partner’s capital balance on January 1.
3. Any remaining net income divided to Paulson and O’Brien, 2:1. Paulson and O’Brien had $50,000 and $120,000, respectively, in their January 1 capital balances. Net income for the year was $33,000.

How much net income should be distributed to Paulson?

Answer:

Distributed to Paulson and O’Brien:  
Paulson O’Brien  Total   Annual salary.................................................... $26,000 $ — $26,000 Interest..............................................................  2,5001  6,0002  8,500 Deduct excess of allowances over income....  (1,000)3  (500)4   (1,500) Total distributed to partners ........................... $27,500 $5,500 $33,000  1$50,000 × 5% 2$120,000 × 5% 3($33,000 – $26,000 – $8,500) × 2/3 4($33,000 – $26,000 – $8,500) × 1/3   


Paulson: $27,500

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