Question

Compose a memo addressing the allocation of profits to three partners of a new business: Alan, Bob, and Carol. It is your responsibility to address the potential ways in which the first-year profits can be divided among these partners, including whether the partners should be taking a salary, how the partners' capital accounts may be affected by various decisions, and the most ethical way that the profits could be divided.

Your memo should answer the following prompt: A new business client comes to your office. There are three owners of the business. The three individuals, Alan, Bob, and Carol, are thinking about forming a partnership. Alan is only investing $1 million in cash. He will not have anything to do with the daily activities of the business. Bob has had some experience in the business and will be responsible for the day-to-day operations of the business. Carol has a great deal of experience and many contacts within the business. She will be responsible for attracting new clients. Neither Bob nor Carol are investing cash into the partnership. During the first year of operation, the partnership generated a profit of $150,000. None of the partners received distributions during the year.

Specifically, the following critical elements must be addressed:

I. Allocation of Profits

A. Explain how allocating the profits evenly between the partners would work. Consider the fairness to each of the partners in your response.

B. What would be the value of each partner's capital account at the end of the year, given that the profits were allocated evenly among the three?

Support your answer with quantitative data and an explanation of how you came to this conclusion.

C. Explain an alternative method of allocating the profits if 80% of the profits was given to the cash investor and the remaining amount was split

evenly between the other two partners.

D. What would be the value of each partner's capital account at the end of the year, given this alternative allocation method? Support your

answer with quantitative data and an explanation of how you came to this conclusion.

Answer 1

Answers:

I Allocation of Profit is Equally for all these Partners  

Alal Bob Carol

Total Profit 150000/-

Distribute All Partners Equally

=150000/3

=50,000 Each Answers

A) Because Alal Invest Cash in Business and Bob have an Experience in Business and Carol Have a Good Experience and attract new Client in Business.

All the Partners are Want to earn Profit.

B) Capital Balance in Year end

Alal Bob Carol

Opening Balance 10,00,000 0 0

Add: Profit 50,000 50,000 50,000

Clossing Bal. 10,50,000 50,000 50,000

C) If alternate Method

80 % Profit Given To cash Investor that is 120,000 (150,000*80%)

Reamaning 30000( 150000-120000)

Divided into Bob, Carol Equally its 15000 each.

D ) Capital Balance Year end

Alal Bob Carol

Opening Capital 10,00,000 0 0

Add : Profit 80.000 15000 15,000

Clossing Capital 10,80,000 15000 15000

if Bob and Carol and Alal Not Equally Divided Profit

Bob and Carol Is Want to Salary for Working in form Whole Year

Before Divided Profit Less Salary for Bob and Carol in Market Trande Rate.