Question

Mark felt like he had little choice but to work with Randy as he is “family” and that while he had some concerns the extra injection of capital would help. As Mark suspected it was hard work getting Randy to make a real contribution, and even turning up was an issue at times but despite this the business managed to generate a reasonable profit of $63,000. Mark has asked you to help him work out how this profit should be distributed amongst the partners.

Before starting the new partnership Mark agreed that being family they would distribute any profits/losses on a 50:50 basis. However, Mark quite cleverly made the point that Randy didn’t know anything about how the business was run and didn’t really want to learn, preferring just to “feel the music” and that he would be willing to run the day to day operations for a modest Annual Salary of $45,000. Randy agreed to this on the condition that to reward him for contributing his “hard earned” money to the business he would get a return of 10% interest on his capital balance but Mark would only receive 5% as she was already getting a salary. This was all agreed to and put in the partnership agreement.

Required

Calculate the profit distribution after the first year and show how the Equity section of the balance sheet would look after this distribution.

Answer 1

Particulars	Amount
Profit Generated after considering Mark Salary (assumed)	$63,000
Less : Interest Paid to Mark (5% on 100000 as his capital)	$5,000
Less : Interest Paid to Randy (10% on 500000 capital)	$50,000
Profit transferred to Balance Sheet as retained earnings	$8,000

Balance Sheet	Amount
Partner's Capital
Mark	$100,000
Randy	$500,000
Retained Earnings	$8,000
Total Equity fund	$608,000

Note : Profit & loss distribution by partners in the ratio of 50:50. As mark decided to get the income equelly for both. But for the efforts taken by Mark, he need to contribute only $ 100000 as capital & Randy should contribute $500000.

Partners	Capital Amount	Interest	Salary	Total income received as 50:50
Mark	$100,000	$5,000	$45,000	$50,000
Randy	$500,000	$50,000	$0	$50,000
Total	$600,000	$55,000	$45,000	$100,000