Shelby and Mortonson formed a partnership with capital contributions of $300,000 and $400,000, respectively. Their partnership agreement calls for Shelby to receive a $60,000 per year salary. Also, each partner is to receive an interest allowance equal to 10% of a partner’s beginning capital investments. The remaining income or loss is to be divided equally. If the net income for the current year is $125,000, then Shelby and Mortonson’s respective shares are:

A. $62,500; $62,500

B. $90,000; $35,000

C. $87,500; $37,500

D. $85,000; $40,000

E. $92,000; $33,000

Answer: C

Feedback:

Shelby Mortonson Total

Net income $125,000

Salary allowance $60,000 (60,000)

Interest allowance 30,000 40,000 (70,000)

Balance of loss (5,000)

Balance divided equally (2,500) (2,500) 5,000

Total $87,500 $37,500 $ 0