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

a)

Allocation of Partnership's Net Income for the Current Year
S.No	Particulars	Amount in $
		Ace	Deuce	Total
A	Net Income for the year			2,00,000
B	Number of Billable Hours of each partner ( Hrs )	2000	1500
C	Hourly Rate of each partner	20	30
D	Respective Income of Billable Hours ( B*C )	40000	45000	85,000
F	Capital Investment by each partner	80000	50000
G	Interest rate on capital investment ( % )	10	10
H	Interest on Capital for each Partner	8000	5000	13,000
I	Other Income ( A-D-H )			1,02,000
J	Profit Sharing Ratio	1	1
K	Share of Other Income to each Partner ( I/2)	51000	51000
L	Total Profit Earned by each Partner	99000	101000	2,00,000

b)

Allocation of Partnership's Net Income for the Current Year
S.No	Particulars	Amount in $
		Ace	Deuce	Total
A	Net Income for the year			2,00,000
B	Number of Billable Hours of each partner ( Hrs )	2000	1700
C	Hourly Rate of each Partner	20	30
D	Respective Income of Billable Hours ( B*C )	40000	51000	91,000
F	Capital Investment by each partner	100000	50000
G	Interest rate on capital investment ( % )	12	12
H	Interest on Capital for each Partner	12000	6000	18,000
I	Other Income ( A-D-H )			91,000
J	Profit Sharing Ratio	1	1
K	Share of Other Income to each Partner ( I/2)	45500	45500
L	Total Profit Earned by each Partner	97500	102500	2,00,000
M	Total Profit Earned by each Partner in the previous case	99000	101000
N	Increase / ( Decrease ) ( L - M )	(1500)	1500