Exercise 2-3 Division of Profits: Interest on Average Capital and Salaries to Partner

The partnership of Benito and Bunye has the following provisions in the partnership agreement:
1. A partner earns 10% interest on the excess of his average capital over the other partner.
2. Benito and Bunye are allowed annual salaries of P300,000 and P200,000 respectively.
3. Any remaining profit or loss is to be divided in the ratio of 70:30.
The average capital of Benito is P1,000,000 and that of Bunye is P600,000.
Instructions: Prepare a profit distribution schedule assuming the profit of the partnership is (a) P700,000 and (b) 400,000.

Benito P 1,000,000
Bunye 600,000
Excess 400,000
Interest 10%
Total 40,000

(a)

Benito Bunye Total

Amount being allocated 700,000
200,00
Salaries 300,000 500,000
0
Interest of 10% on excess of average
40,000 - 40,000
capital
Allocation of Remaining profit
(700,000-540,000 = 160,000) 112,000 48,000 160,000
(160,000x70%) ; (160,000 x 30%)
248,00
As allocated 452,000 500,000
0

(b)

Benito Bunye Total

Amount being allocated 400,000
Salaries 300,000 200,000 500,000
Interest of 10% on excess of average
40,000 - 40,000
capital
Allocation of Remaining profit
(400,000-540,000 = -140,000) (98,000) (42,000) (140,000)
(160,000x70%) ; (160,000 x 30%)

As allocated 242,000 158,000 400,000