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

Exercise 11

Allocating profits and losses. Johnson, Larson, and Kragen own an advertising agency that they operate as a partnership. The partnership agreement includes the following:
a. Johnson receives a salary of $50,000.
b. Larson receives a salary of $60,000.
c. Kragen receives no salary but a bonus equal to 10% of income after the bonus.
d. All partners are to receive 10% interest on their average capital invested. The average capital balances are $40,000, $25,000, and $145,000, respectively, for Johnson, Larson, and Kragen.
e. Any residual amounts of profit are to be divided equally between the partners.
1. Determine how $220,000 of income would be allocated.
2. Determine how a loss of $34,000 would be allocated assuming a priority system for allocating losses is not followed.
3. Determine how $132,000 of income is allocated among the partners assuming the following priority system: income should be allocated by first giving priority to salary, then bonus, then interest on invested capital, and then according to the profit and loss percentages.