Money and Banking
Question 12-5) in this situation the partnership income is split according to the agreement. The partners take their allowances and then split the balance according to the agreement. The partners made $98,800 in profit. From this, they take their salary allowances. Kramer takes $50,000 and Knox takes $40,000. They then take the 10% interest allowances. Kramer invested $60,000 so he takes $6,000. Knox invested $80,000 so he takes $8,000. At this point, no profit remains and in fact there is a negative balance of $5,200. This remainder is divided amongst the partners based on the sharing agreement, so 50/50. Thus, they each take a deficit of $2,600.
This gives Kramer a total of 50,000 + 6000-2600 = $53,400. For Knox, the figures are 40,000 + 8000-2600 = $$45,400.
The same calculation is used if the partnership loses money. The initial loss recorded is $16,800. Once Kramer and Knox take their respective salary and interest allowances, the loss becomes $120,800. This is divided equally as per the agreement, so each partner takes a loss of $60,400. After this loss is subtracted from their respective payouts, Kramer has a loss of $4,400 and Knox has a loss of $12,400.
12-8) if Tulip is paid $60,000 for her equity, that is a no bonus scenario. The entry would be:
Tulip, capital $60,000
Cash $60,000
If Tulip is paid $80,000 that is a bonus to the retiring partner. The remaining partners would pay out Tulip based on their new income sharing ratios, which would be 5:3, reflecting the degree of increased share each has of the partnership with the withdrawal of Tulip. The payout is $20,000.
Tulip, capital $60,000
Holland, capital $12,500
Flowers, capital $7,500
Cash $80,000
If Tulip is paid $30,000 this reflects a bonus to the remaining partners. Since Tulip's value was $60,000 the remaining $30,000 would be allocated to Holland and Flowers based on the new ratios.
Tulip, capital $60,000
Holland, capital $18,750
Flowers, capital $11,250
Cash $30,000
12-12) Return on equity is the net income for each partner divided by the average equity. Average equity is calculated based on the starting and ending equity levels for the year. Soccer LP made $22,134 on an average equity of $200,067 for an ROE of 11.06%. Football LP made $445,898 on an average equity of $955,948 for an ROE of 46..6%. The partnership made $468,032 on an average equity of $1,156,016 for an ROE of 40.48%.
