Mo, Lu, and Barb formed the MLB Partnership by making investments of $67,500, $262,500, and $420,000, respectively. They predict annual partnership net income of $450,000 and are considering the following alternative plans of sharing income and loss: (a) equally; (b) in the ratio of their initial capital investments; or (c) salary allowances of $80,000 to Mo, $60,000 to Lu, and $90,000 to Barb; interest allowances of 10% on their initial capital investments; and the remaining balance shared as follows: 20% to Mo, 40% to Lu, and 40% to Barb

Sharing Of Income and Losses

MO Lu Barb

(a) Equally $150,000 $150,000 $150,000

(b) On Capital Investment Ratio $40,500 $157,500 $252,000

(c)

Salary $80,000 $60,000 $90,000

Interest $6,750 $26,250 $42,000

Income $29,000 $58,000 $58,000

Total $115,750 $144,250 $190,000

Explanation:

Working

(a)

Equally

$450,000 / 3 = $90,000 each

(b)

Based on the ratio of their initial capital investments

Total Investment = $67,500 + $262,500 + $420,000 = $750,000

Mo = $450,000 x $67,500 / $750,000 = $40,500

Lu = $450,000 x $262,500 / $750,000 = $157,500

Barb = $450,000 x $420,000 / $750,000 = $252,000

(c)

Salary allowances of $80,000 to Mo, $60,000 to Lu, and $90,000 to Barb; interest allowances of 10% on their initial capital investments; and the remaining balance shared as follows: 20% to Mo, 40% to Lu, and 40% to Barb

Total salary = $80,000 + $60,000 + $90,000 = $230,000

Interest on initial Capital

Mo = 10% x $67,500 = $6,750

Lu = 10% x $262,500 = $26,250

Barb = 10% x $420,000 = $42,000

Total Interest Payment = $6,750 + $26,250 + $42,000 = $75,000

Residual Income Tot be distributed = $450,000 - $230,000 - $75,000 = $145,000

Mo = 20% x $145,000 = $29,000

Lu = 40% x $145,000 = $58,000

Barb = 40% x $145,000 = $58,000