Partners Don and Ron have agreed to share profits and losses in an 80:20 ratio respectively, after Don is allowed a salary allowance of $80,000 and Ron is allowed a salary allowance of $40,000. If the partnership had net income of $80,000 for 2010, Ron's share of the income would be

Question

Quizplus · Accepted Answer

First, we need to calculate the total salary allowance deducted from the net income:

$80,000 (Don's salary allowance) + $40,000 (Ron's salary allowance) = $120,000

The remaining net income after deducting the salary allowance is:

$80,000 (net income) - $120,000 (salary allowance) = $-40,000

The negative result means that the partnership operated at a loss, and Don would bear the entire loss as Ron's share in losses is 0%.

Now, we calculate Ron's share of the income:

$80,000 (net income) x 20% (Ron's profit share ratio) = $16,000

However, since the net income is negative, Ron's share is also 0, as he would not receive any profits in a loss situation.

Therefore, Ron's share of the income is $0, which corresponds to choice letter B.

Partners Don and Ron Have Agreed to Share Profits and Losses