Income allocation in a partnershipKramer and Knox began a partnership by investing $60,000 and $80,000, respectively. During its first year, the partnershipearned $160,000. Prepare calculations showing how the $160,000 income should be allocated to the partners under eachof the following three separate plans for sharing income and loss: (1) the partners failed to agree on a method to share income; (2) the partners agreed to share income and loss inproportion to their initial investments (round amounts to the nearest dollar); and (3) the partners agreed to share incomeby granting a $50,000 per year salary allowance to Kramer, a $40,000 per year salary allowance to Knox, 10% interest ontheir initial capital investments, and the remaining balance shared equally.

1. $68,571 on Kramer and $91,429 on Knox

2. $68,571 on Kramer and $91,429 on Knox

3. $84,000 on Kramer and $76,000 on Knox

Explanation:

1. In absence of the agreement on how the profit or loss will be allocated, we will use the ration based on the capital balances of the partners.

Kramer $60,000

Knox $80,000

Total $140,000

The allocation would be:

Kramer $160,000 x (60,000/140,000) = $68,571

Knox $160,000 x (80,000/140,000) = $91,429

2. The partners agreed to divide profit based on the initial investment of the partners.

Kramer $60,000

Knox $80,000

Total $140,000

The allocation would be:

Kramer $160,000 x (60,000/140,000) = $68,571

Knox $160,000 x (80,000/140,000) = $91,429

3. The partners agrred to allocate the profit based on the salaries given to the partners, 10% interest and divide the excess equally.

Kramer Knor Total

Salary 50,000 40,000 90,000

Interest 6,000 8,000 14,000

Excess 28,000 28,000 56,000

TOTAL 84,000 76,000 160,000

Interest

Kramer $60,000 x 10% = $6,000

Knox $80,000 x 10% = $8,000