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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Dividing partnership income

Terry Willard and Jasmine Hill decide to form a partnership. Willard will contribute $300,000 to the partnership, while Hill will contribute only $30,000. However, Hill will be responsible for running the day-to-day operations of the partnership, which are anticipated to require about 45 hours per week. In contrast, Willard will only work five hours per week for the partnership. The two partners are attempting to determine a formula for dividing partnership net income. Willard believes the partners should divide income in the ratio of 7:3, favoring Willard, since Willard provides the majority of the capital. Hill believes the income should be divided ":3, favoring Hill, since Hill provides the majority of effort in running the partnership business.

How would you advise the partners in developing a method for dividing income?

To determine

Partnership

It is that form of organization which is owned and managed by two or more persons who invest and share the profits and losses according to a pre-determined ratio.

Forming a Partnership

While forming the partnership, the contribution of assets by partners are debited to the partnership assets account; whereas the liabilities of the partnerships are credited to the partnership’s liabilities account, and the net amount of the investments of partners are credited to the partners’ individual capital account.

To Suggest:  The partners in developing a method for dividing income

Explanation

 1. If interest is paid on each partners’ capital balance then Partner W would be satisfied as he will receive more amount of interest for his contribution of more capital to the firm compared to Partner H.

2. If salary is paid to partners, then Partner H would be satisfied as he provides the majority of effort in running the partnership.

3. Both partners wanted the division of income should be favorable to them for different reasons...

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