The SRT partnership agreement specifies that partnership net income be allocated as follows:

Partner S Partner R Partner T

Salary allowance $20,000 $25,000 $15,000

Interest on average capital balance 10% 10% 10%

Remainder 30% 30% 40%

Average capital balances for the current year were $60,000 for S, $50,000 for R, and $40,000 for T.

Refer to the information given. Assuming a current year net income of $125,000, what amount should be allocated to each partner?

Partner S Partner R Partner T

A. $15,000 $15,000 $20,000

B. $37,500 $37,500 $50,000

C. $41,000 $45,000 $39,000

D. $42,000 $48,000 $35,000

Answer: Option (C) is correct.

Explanation:

Given that,

Partner S:

Salary allowance = $20,000

Interest on average capital balance = 10% of 60,000

= $6,000

Average capital balances for the current year = $60,000

Remainder = 30% of 50,000

= $15,000

Amount should be allocated = Salary allowance + Interest on average capital balance + Remainder

= $20,000 + $6,000 + $15,000

= $41,000

Partner R:

Salary allowance = $25,000

Interest on average capital balance = 10% of 50,000

= $5,000

Average capital balances for the current year = $50,000

Remainder = 30% of 50,000

= $15,000

Amount should be allocated = Salary allowance + Interest on average capital balance + Remainder

= $25,000 + $5,000 + $15,000

= $45,000

Partner T:

Salary allowance = $15,000

Interest on average capital balance = 10% of 40,000

= $4,000

Average capital balances for the current year = $40,000

Current year net income = $125,000

Remainder = 40% of 50,000

= $20,000

Amount should be allocated = Salary allowance + Interest on average capital balance + Remainder

= $15,000 + $4,000 + $20,000

= $39,000

Workings:

Salary allowed = $20,000 + $25,000 + $15,000

= $60,000

Interest on average capital balance = $6,000 + $5,000 + $4,000

= $15,000

Total = Salary allowed + Interest on average capital balance

= $60,000 + $15,000

= $75,000

Remainder = Current year net income - Total

= $125,000 - $75,000

= $50,000