Question

Under a partnership agreement, Sherry is to receive 25% of the partnership income, but not less than $10,000. The partnership has net income of $30,000 for Year 1 before any allocation. Calculate Sherry’s guaranteed payment from the partnership for Year 1.

Answer 1

$2,500

Step-by-step explanation:

since Sherry will receive at least $10,000 or 25% of the partnership's net income, then the guaranteed payment = $10,000 - ($30,000 x 25%) = $10,000 - $7,500 = $2,500

When partnerships include guaranteed minimum payments, he/she will receive that amount even if the partnership's net income is not high enough. If the partnership's net income would have been $40,000 or more, then there would be no guaranteed payment (= $40,000 x 25% = $10,000).