The SRT partnership agreement specifies that partnership net income be allocated as follows in the following order: Partner S Partner R Partner TSalary allowance $20,000 $25,000 $15,000Interest on avg. capital balance 10% 10% 10%Remainder 30% 30% 40%Average capital balances for the current year were $60,000 for S, $50,000 for R, and $40,000 for T. Refer to the information given. Assuming no restrictions and current year net income of $45,000, what amount should be allocated to each partner? Partner S Partner R Partner TA) $17,000 $21,000 $7,000B) ($9,000) ($9,000) ($12,000)C) $13,500 $13,500 $18,000D) $22,500 $22,500 $0

Solution :

Note 1

calculation of remaining income after distribution of salary and interest on capital.

Total Net Income                                             $ 45,000

Less : Salary allowance                                   $ 60,000

($20,000 + $25,000 + $15,00)

Less : Interest on capital                                 $ 15,000

($ 6,000 + $ 5,000 + $ 4,000)

Remaining income / (loss) to be allocated    $ 30,000

Since the remaining income is negative, i.e. it loss to the SR partnership, so such Loss will also be allocated to the partners. Since in a partnership, Partners are required to share profits as well as losses. Hence, such loss will be deducted from the other shares.

Scheduled of amount allocated to each partner

                                                          Partners S      Partner R        Partner T

a). Salary allowance allocated          $ 20,000        $ 25,000       $ 15,000

b). Interest on average capital            $ 6000          $ 5000          $ 4000

    balance allocated.

c). Remaining income allocated       $ 9000           $ 9000          $ 12,000

Total allocation (a + b - c)  :                $ 17,000        $ 21,000        $ 7,000

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