PROBLEM C.10
COMEDY TODAY (concluded)
b. General Journal
30 Minutes, Medium PROBLEM C.11
ROTHCHILD FURNISHING’S, INC.
Partner Partner Partner Net
Axle Brandt Conrad Income
a. Net income to be divided 526,000$
Salary allowances to partners 10,000$ 50,000$ 28,000$ (88,000)
Income after salary allowances 438,000$
Interest allowances on capital:
Axle ($180,000 x 12%) 21,600
Brandt ($140,000 x 12%) 16,800
Conrad ($80,000 x 12%) 9,600
Total allocated as interest (48,000)
Remaining income after salary and interest allowances 390,000$
Allocated in a fixed ratio:
Salary allowances to partners 10,000$ 50,000$ 28,000$ (88,000)
Income after salary allowances 7,000$
Interest allowances on capital:
Axle ($180,000 x 12%) 21,600
Brandt ($140,000 x 12%) 16,800
Division of Net Income
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PROBLEM C.11
ROTHCHILD FURNISHING’S, INC. (concluded)
Partner Partner Partner Net
Division of Net Income
a.
b.
$ 1,000,000
Limiting personal liability. For example, in the event that some customers are made ill
by tainted or spoiled meat, the business might incur a liability which could bankrupt the
The corporate form could enable Weber to gradually transfer ownership interests in the
business to his children or other heirs.
Computation of income that Weber would have retained after income taxes if the business
were still organized as a sole proprietorship:
Income before taxes (also net income) …………………………………..
PROBLEM C.12
PRIME CUTS
Several reasons why it might be advantageous for Weber to have incorporated his business
include:
40 Minutes, Strong
PROBLEM C.12
PRIME CUTS (concluded)
e.
Note to instructor: You may wish to expand upon this point to illustrate a potential benefit of the
There are many ways in which Weber could reduce this “tax bite.” In fact, his current
strategies are maximizing the adverse effects of “double taxation.” Weber should consider:
PROBLEM C.13
RAMIREZ AND SMITH
a.
b.
c. The preceding schedule shows that Partner Ramirez will have a $14,000 advantage over
Partner Smith in both years. In the first year Ramirez will be credited with income of
value assigned to services rendered by Smith. On the other hand, the value of the additional
$20,000 capital invested by Smith causes Smith to earn $4,000 more “interest” than is
allocated to Ramirez. The salary differential of $18,000 exceeds the interest differential of
$4,000 by $14,000, which as pointed out above, is the annual advantage to Ramirez. This
$14,000 per year advantage to Ramirez will continue, regardless of changes in partnership
income, as long as salaries and interest on capitals remain at present levels. This income-
sharing agreement meets the goals of recognizing differences in the value of personal
services and capital investments made available to the business by each partner.
Note to instructor: Because students are asked to draw up their own income-sharing proposal,
this is not the only possible acceptable solution. For example, students might reasonably vary
the rate of return allowed on partners’ invested capital or find a reason for sharing residual
profits on some basis other than equally.
30 Minutes, Medium
Income-sharing proposal:
Assuming that the present earning capacity of the two partners reflects the relative value of
their services to the new partnership, the difference in the value of their services should be
residual profit or loss should be divided unequally. Therefore, it seems reasonable for the
partners to share 50:50 in any residual income or loss.
(Part b is on next page.)
PROBLEM C.13
RAMIREZ AND SMITH (concluded)
b. RAMIREZ AND SMITH
Division of Partnership Net Income Net
Income
(
Loss
)
Ramirez Smith
A
llocated
First
y
ear:
Net income
(
loss
)
to be divided
(
10,000
)
$
Salar
y
allowances to partners 48,000$ 30,000$
(
78,000
)
Remainin
g
income
(
loss
)
after salar
y
allowances
(
88,000
)
$
(
)
g
(
)
y
(
)
(
)
(
)
(
)
(
)
y
(
)
g
(
)
y
(
)
g
(
)
y
(
)
)
(
)
(
)