Question

The Ace and Deuce partnership has been created to operate a law firm. The partners are attempting to devise a fair system to allocate profits and losses. Ace plans to work more billable hours each year than Deuce. However, Deuce has more experience and can charge a higher hourly rate. Ace expects to invest more money in the business than Deuce.

REQUIRED Build a spreadsheet that can be used to allocate profits and losses to these two partners each year. The spreadsheet should be constructed so that the following variables can be entered:

Net income for the year.

Number of billable hours for each partner.

Hourly rate for each partner.

Capital investment by each partner.

Interest rate on capital investment.

Profit and loss ratio.

Use this spreadsheet to determine the allocation if partnership net income for the current year is $200,000, the number of billable hours is 2,000 for Ace and 1,500 for Deuce, the hourly rate for Ace is $20 and for Deuce is $30, and investment by Ace is $80,000 and by Deuce is $50,000. Interest on capital will be accrued each year at 10 percent of the beginning balance. Any remaining income amount will be split 50-50.

Use the spreadsheet a second time but make these changes: Deuce reports 1,700 billable hours, Ace invests $100,000, and interest will be recognized at a 12 percent annual rate. How do these three changes impact the allocation of the $200,000?

Answer 1

In the first case, the calculations are shown below :

Particulars	Ace	Deuce	Total
Net income for the year			200000
Number of billable hours for each partner	2000	1500
Hourly rate for each partner	20	30
Total	40000	45000	85000
Capital investment by each partner	80000	50000
Interest rate on capital investment	10%	10%
Interest	8000	5000	13000
Remaining Profits			102000
Profit sharing in 1:1	51000	51000
Total income share	99000	101000

With the changed scenario, the calculations are shown below :

Particulars	Ace	Deuce	Total
Net income for the year			200000
Number of billable hours for each partner	2000	1700
Hourly rate for each partner	20	30
Total	40000	51000	91000
Capital investment by each partner	100000	50000
Interest rate on capital investment	12%	12%
Interest	12000	6000	18000
Remaining Profits			91000
Profit sharing in 1:1	45500	45500
Total income share	97500	102500

The spreadsheet model is attached in the screenshot .