Question

Sheldon and Morton formed a partnership with capital contributions of $80,000 and $40,000, respectively. Their partnership agreement calls for salaries of $10,000 to Sheldon and $25,000 to Morton. 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 $90,000, then Sheldon's and Morton's respective shares are___________.

Answer 1

The answer is:

Sheldon: $39, 500; Morton: $50, 500

Step-by-step explanation:

A partnership is a binding agreement between two or more parties to carry on a business. The sole purpose of this agreement is to share skills and expertise so as to generate a profit. In a partnership, the partners have unlimited liability meaning that if the business established by the partners in unable to repay creditors, the creditors are legally allowed to seize the personal assets of the partners to cover the debts owing. However, in accounting for financial performance, the business is considered to be a separate entity (exists independent of the partners). Sheldon and Morton have established a profit-sharing arrangement that compensates Sheldon for the capital contribution (larger interest share) and Morton for his contributions to the business operations (larger salary share). The profit after these deductions is shared equally between the 2 partners. Assuming the given net income is after operations but before partner deductions, the share of the partners is calculated as follows:

Sheldon Morton

Interest $8,000 $4,000

Salaries $10,000 $25,000

Profit share $21, 500 $21, 500

Total share $39, 500 $50, 500

Interest (10% * $80, 000) (10% * $40, 000)

Profit share (50% * $43,000) (50% * $43,000)

Net Profit Share: $90, 000 - $(8,000 + 10,000 + 4,000 + 25,000)= $43,000