Question

ABC has recently formed a partnership by investing $45,000, $60,000, and $35,000, respectively. They are considering several methods of allocating profits and losses.

Calculate the partners' shares of profits and losses under each of the following separate plans. Justify your answer.

a)   Profit is $23,985 and the partners could not agree on a plan for profit/loss division.

b)   The loss is $16,000 and the partners agreed to share in the profits based on a 2:2:1 ratio. The agreement did not address losses.

c)   Profit is $36,000 and the partners agreed to share profits based on the relationship of their initial capital balances.

d)   The loss is $24,000 and the partners agreed to share profits and losses based on 15% to A, 50% to B, and 35% to C.

Round all answers to the nearest whole dollar

Answer 1

a. If no partnership agreement is there , the profit/loss shall be shared equally among the partners.

So share of profit is as follows÷

A = 23,985 *1/3 = $ 7,995

B = 23,985 *1/3 = $ 7,995

C = 23,985 *1/3 = $ 7,995

b. The partners agreed for profit sharing ratio and not for loss sharing ratio so the losses will be shared equally among the partners ÷

A = 16,000 *1/3 = $ 5,333 (loss)

B = 16,000 *1/3 = $ 5,333 (loss)

C = 16,000 *1/3 = $ 5,334 (loss)

Note : $ 1 is adjusted to partner C as the total loss is $16,000.

c. Profit sharing ratio is based on initial capital balance i.e.

45,000:600,000:350,000 = 9:12:7

So the share of profit is as follows ÷

A = 36,000*9/28 = $ 11,571

B = 36,000 *12/28 = $ 15,429

C = 36,000 *7/28 = $ 9,000

9 + 12 + 7 = 28

d. Sharing percentage is given. So loss will be as follows÷

A = 24,000*15% = $ 3,600 (loss)

B = 24,000 *50% = $ 12,000 ( loss)

C = 24,000 *35% = $ 8,400 (loss)