Question

William and Paul own a business selling face masks and hand sanitiser. They agreed that profits will be spilt 80% to William and 20% to Paul and that losses will be split 50% to each of them. They also agreed that before any profits or losses are split Paul gets a salary and William gets interest on his capital contributions. Paul gets a salary because he spends most of his time in the shop dealing with customers. William only provided capital to the business. William also made an arm’s length loan to the business. The partners provide you with the following information for the year ended 30 June 2019: Sales of trading stock for the business $330,000 Interest paid to William (Capital Contribution) $13,000 Salary to Staff of the business $75,000 Purchase of trading stock for the business $200,000 Opening Stock on 1 July 2018 $37,000 Closing Stock on 30 June 2019 $23,000 Interest paid to William (Loan) $5,000 Superannuation for Paul $9,000 Superannuation for Staff of the business $6,000 Required: Calculate the partnership distribution for each partner for the year ended 30 June 2019. You must give reasons for your answer. Your discussion must include an analysis of the pertinent sections of the relevant legislation, rulings, and the relevant case law. If relevant, you must show your calculation. You must apply the law to the facts and provide YOUR OWN analysis of the issues and write a comprehensive answer to the question.

Answer 1

Calculation of net profit of the business.

Sales-     $330,000

Closing stock-   $23,000

  ————————-

  $353,000

Less: expenses

Opening stock.     $37,000

Purchases.   $200,000

Salary to staff.   $75,000

Intt. on contributed capital  $13,000

Superannuation to Paul     $9,000

Superannuation to staff.   $6,000

     ——————————-

Net profit of the business.   $13,000

Net profit will distribute among William and Paul in their decided ratio i.e. 80% & 20%

Share of Paul will receive 20% of $13,000 = $2,600.

Share of William will receive 80% of $13,000 = $10,400. But William has already withdrawn a loan of sum of $,5000 so now William will receive only $5,400.

As per the partnership act of 1932 the profit sharing ratio among partners should be 1:1 unless agreed otherwise irrespective of the contributions made by the partners.

In simple words, It means profit sharing ratio should be 1:1 or it should be mutually decided by the partners and it should be clearly mentioned in the partnership deed.

If the partnership deed/ agreement doesn’t contain their profit sharing ratio then it would be equal(1:1).  It doesn't matter who is more active or who has given more capital moreover any ratio which is mutually considered appropriate by the partners and mentioned in partnership deed is acceptable.

In this case, William and Paul has mutually understand related to profit sharing ratio so this is acceptable as per rules and legislation.