Seth and Rachel have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $27,000 and $18,000, respectively; and the remainder divided equally. How much of the net loss of $16,000 is allocated to Seth?

Question

Quizplus · Accepted Answer

First, calculate the interest on original investments: Seth gets $5,000 (10% of $50,000) and Rachel gets $10,000 (10% of $100,000). Next, add the salary allowances: Seth gets $27,000 and Rachel gets $18,000. Total allocations before sharing the remainder are $32,000 for Seth and $28,000 for Rachel. Since there is a net loss of $16,000, the total allocations exceed the net income, so the loss is shared equally. Each partner absorbs half of the $16,000 loss, which is $8,000. Seth's final allocation is $32,000 - $8,000 = $24,000, but since the question asks for the loss allocation, Seth absorbs $6,000 of the loss.

Seth and Rachel Have Original Investments of $50,000 and $100,000