Nguyen invested $100,000 and Hansen invested $200,000 in a partnership. They agreed to share incomes and losses by allowing a $60,000 per year salary allowance to Nguyen and a $40,000 per year salary allowance to Hansen, plus an interest allowance on the partners' beginning-year capital investments at 10%, with the balance to be shared equally. Under this agreement, the shares of the partners when the partnership earns $105,000 in income are:

Question

Quizplus · Accepted Answer

First we calculate the interest allowance on the capital investment:

Nguyen's investment earns 10% interest: $100,000 * 10% = $10,000
Hansen's investment earns 10% interest: $200,000 * 10% = $20,000

Thus, the income before salary allowances is:

Total income: $105,000 
Interest allowance: $10,000 + $20,000 = $30,000 
Income after interest allowance: $105,000 - $30,000 = $75,000

Now we subtract each partner's salary allowance:

Nguyen's salary allowance: $60,000 
Hansen's salary allowance: $40,000

Adjusted income after salary allowances:

Income after salary allowances: $75,000 - $60,000 - $40,000 = $-25,000

Since the adjusted income is negative, the partners do not share the profits equally. Instead, the losses are shared in proportion to the partners' original investment amounts.

Nguyen invested $100,000 and Hansen invested $200,000, so the ratio of their investment amounts is 1:2.

Nguyen's share of the losses: $-25,000 * 1/3 = $-8,333.33 (rounded to nearest cent) 
Hansen's share of the losses: $-25,000 * 2/3 = $-16,666.67 (rounded to nearest cent)

(We divide by 3 to account for the fact that Nguyen will receive a $60,000 salary even though the partnership has a loss.)

To find each partner's final share of the income or loss, we add their share of the losses to their salary allowance:

Nguyen's share of the income or loss: $60,000 - $8,333.33 = $51,666.67 (rounded to nearest cent) 
Hansen's share of the income or loss: $40,000 - $16,666.67 = $23,333.33 (rounded to nearest cent)

Therefore, the partners' shares when the partnership earns $105,000 in income are:

Nguyen: $51,666.67 
Hansen: $23,333.33

So the answer is choice C, $57,500 to Nguyen; $47,500 to Hansen, which is the closest option to the actual answer, $51,666.67 to Nguyen and $23,333.33 to Hansen.

Nguyen Invested $100,000 and Hansen Invested $200,000 in a Partnership