Partnership Agreement
Nitty and Gritty are considering the formation of a partnership to operate a crafts and hobbies store. They have come to you to obtain information about the basic elements of a partnership agreement. These agreements usually specify an income and loss–sharing ratio. They also may provide for additional income and loss–sharing features such as salaries, bonuses, interest allowances on invested capital.
Required
a. Discuss why a partnership agreement may need features in addition to the income and loss–sharing ratio.
b. Discuss the arguments in favor of recording salary and bonus allowances to partners as expenses included in computing net income.
c. What are the arguments against recording salary and bonus allowances to partners as partnership expenses?
d. Some partnership agreements provide for interest on invested capital in distributing income to the individual partners. List the additional provisions that should be included so the interest amounts can be computed.
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