MJG and EFG established a partnership on January 1, 2010. MJG invested cash of $
ID: 2397965 • Letter: M
Question
MJG and EFG established a partnership on January 1, 2010. MJG invested cash of $100,000 and EFG invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. MJG and EFG agreed to the following procedure for sharing profits and losses:
- 12% interest on the yearly beginning capital balance
- $10 per hour of work that can be billed to the partnership's clients
- the remainder divided in a 3:2 ratio
The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month.
For 2010, the partnership's income was $70,000. MJG had 1,000 billable hours, and EFG worked 1,400 billable hours. In 2011, the partnership's income was $24,000, and MJG and EFG worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2010 and 2011.
Determine the amount of net income allocated to each partner for 2010.
Explanation / Answer
MJG
EFG
Billable Hours Income
10,000
14,000
Interest on Capital
12,000
9,600
Remaining Profits 24,400
14,640
9,760
Total
36,640
33,360
Interest on Capital
MJG = 12% of 100,000 = 12000
EFG = 12% of 80,000 = 9600
Remaining Profits have been distributed in the ratio of 3:2
MJG
EFG
Billable Hours Income
10,000
14,000
Interest on Capital
12,000
9,600
Remaining Profits 24,400
14,640
9,760
Total
36,640
33,360
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