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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

Negotiating income-sharing ratio

Sixty-year-old Wanda Davis retired from her computer consulting business in Boston and moved to Florida. There she met 27-year-old Ava Jain, who had just graduated from Eldon Community College with an associate degree in computer science. Wanda and Ava formed a partnership called D&J Computer Consultants. Wanda contributed $50,000 for startup costs and devoted one-half time to the business. Ava devoted full time to the business. The monthly drawings were $2,500 for Wanda and $5:000 for Ava.

At the end of the first year of operations, the two partners disagreed on the division of net income. Wanda reasoned Out the division should be equal. Although she devoted only one-half time to the business, she contributed all of the startup funds. Ava reasoned that the income-sharing ratio should be 2:1 in her favor because she devoted full time to the business and her monthly drawings were twice those of Wanda.

  1. a. What flaws can you identify in the partners' reasoning regarding the income-sharing ratio?
  2. b. How could an income-sharing agreement resolve this dispute?

a.

To determine

Income-sharing ratio

The ratio in which the income of partnership firm is distributed among the partners is known as the income-sharing ratio.

To explain: The flaws in the partners’ reasoning regarding the income sharing ratio.

Explanation

Partners share the income of partnership firm as per the income sharing ratio in the partnership agreement. In the absence of income sharing ratio partners are supposed to share the income equally...

b.

To determine

To explain: The manner in which the income-sharing agreement can resolve the dispute.

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