Watts and Lyon are forming a partnership. Watts invests $40,000 and Lyon invests $60,000. The partners agree that Watts will work one-fourth of the total time devoted to the partnership and Lyon will work three-fourths. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $24,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $24,000 per year to Lyon, 9% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $18,000 net loss; Year 2, $45,000 net income; and Year 3, $75,000 net income.
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Watts and Lyon are forming a partnership. Watts invests $40,000 and Lyon invests $60,000. The partne...
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