Advanced Accounting 11th Edition by Paul Fischer,William Tayler, Rita Cheng

Exercise 3

Profit allocation based on various factors. Rockford, Skeeba, and Tapinski are partners in a business which manufactures specialty railings. Their profit and loss agreement provides for the allocation of profits and losses as follows:
1. Salaries of $50,000, $40,000, and $55,000 for Rockford, Skeeba, and Tapinski, respectively.
2. Skeeba will receive a bonus equal to 5% of sales in excess of $1,000,000.
3. All partners will receive a bonus of 10% of net income in excess of $150,000 after their bonus.
4. Partners will be allocated interest on their weighted-average capital balance to the extent that it exceeds $50,000. Drawings in excess of annual salaries will be considered a reduction in capital. Interest is computed at the rate of 10%.
5. Remaining profits or losses will be allocated 35%, 25%, and 40% to Rockford, Skeeba, and Tapinski, respectively.
6. Gains or losses from the sale of depreciable assets will be excluded from the above provisions and will be equally allocated between Rockford and Tapinski.
Activity in the partners' capital and drawing accounts during the year was as follows:
Determine how annual income of $280,000 (including a gain on the sale of equipment of $20,000) should be allocated among the partners. Annual sales revenue was $1,300,000.