Applying the interest allowance method, compute Taylor and Timmy's share of net income if Taylor invested $370,000 and Timmy invested $780,000 at a 6% interest rate, for each partner with the remainder to be divided equally. Net income was $90,000.
A) Taylor, $28,957; Timmy, $61,043
B) Taylor, $45,000; Timmy, $45,000
C) Taylor, $32,700; Timmy, $57,300
D) None of these answers is correct.

Question

Quizplus · Accepted Answer

First, calculate the interest allowance: Taylor's interest = $370,000 * 6% = $22,200; Timmy's interest = $780,000 * 6% = $46,800. Total interest = $22,200 + $46,800 = $69,000. Subtract the total interest from net income: $90,000 - $69,000 = $21,000. Divide the remainder equally: $21,000 / 2 = $10,500 each. Taylor's total share = $22,200 + $10,500 = $32,700; Timmy's total share = $46,800 + $10,500 = $57,300.

Applying the Interest Allowance Method, Compute Taylor and Timmy's Share