Question

Lawyer Enrique agrees to perform services for the FGH partnership, In return Enrique receives a 3% profits and loss interest and a capital account of zero.

a) Does Enrique recognize income as a result of the receipt of the profits interest? If yes, how would it be measured? If not, why not?

b) Would the answer to the previous question change (and if so how?) if in addition to the profits interest Enrique also receives a capital account of $15,000?

Answer 1

Answer: as per accounting concepts expenses and losses recognised in the books of account as soon as they occur as per prudence concept but income will recognised when assured or actually received.

if business have a chances of loss in future but this fact he knows today so as per prudence concept he should record such loss as a provision for loss.

onthe other hand income will be recorded only at the time of assured or actually received.

as per given question:

(a) enrique will not recognise income as a result of the receipt of the profits interest because he is not assured of about profits of the firm and not actually received any amount (as per prudence norm)

(B) answer will remain remain same even if enrique receives a capital account of $15000 because capital is contributed in business for doing business and remain in business until business gets dissolved.

so in this case too enrique has not received anything or assured of receive anything.

at the time of business dissolution, enrique get something after paying off all the liabilities and there is some balance remain in his capital account. then he is eligible to record income.