Partner A

Partner B

Partner C


Interest on excess capital balance . . .




$ 3,000

$1 600 2,000* 12,000

$ 3,600 2,000 25,000



Income allocation


*Bonus = 10% (Net Income — Bonus) Bonus = 10% ($22,000 — Bonus) (110%) Bonus = $2,200 Bonus = $2,000

*Bonus = 10% (Net Income — Bonus) Bonus = 10% ($22,000 — Bonus) (110%) Bonus = $2,200 Bonus = $2,000

Normally, the first method also is used when the partnership has an overall loss. For example, given a partnership loss of $2,400, the methodology in Illustration 13-3 would be employed, except that a bonus would not be recognized.

However, it is possible that a separate provision governs those situations in which a net loss exists. The allocation of the assumed loss of $2,400 is shown in Illustration 13-4. In this case, the allocation of the interest and salaries results in allocating $28,600 of income even though there is a loss of $2,400. This results in a deficiency of $31,000 (subtotal of $28,600 plus the loss of $2,400) which must be allocated among the partners according to their profit and loss ratios.

Illustration 13-4 Loss Allocation: Deficiency Allocated in Profit and Loss Ratio

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