Company’s income

Huey, Louie, and Dewey are forming a dental partnership and are concerned about how to allocate the partnership’s income. Once the partnership is formed, Huey will have $200,000 of capital, while Louie and Dewey will have capital of $100,000 and $50,000, respectively. The partnership is considering the following two methods of allocating the company’s income:

Method 1 Salaries: Huey, $30,000; Louie, $15,000; and Dewey, $10,000 Interest of 10 percent on beginning capital balances of all partners Residual allocated on a 3:2:1 basis

Method 2 Salaries: Huey, $15,000; and Louie, $10,000 Interest on beginning capital balances: Huey, 20 percent; Louie, 10 percent; and Dewey, 5 percent Residual allocated equally

Required:

1. Show how the following income and loss amounts would be allocated under each of the two methods.

2. Determine the projected ending capital balances that would result after the allocations from part (1) above.

3. Discuss some reasons the partners might have used to justify each of these income allocation methods.

A. Net income of $150,000.

B. Net income of $50,000.

C. Net loss of $30,000.

Solution: