Question

Richard is a retired solicitor. His wife Tracy is a retired school teacher. Both wish to remain active and they invest in a gift shop that is to be managed by their daughter Alice, who is aged 35. They form a partnership of three called “Alice's Gift Shop”. Richard and Tracy contributed $40,000 each to fund the purchase of the shop. The partnership agreement provides: • Both Richard and Tracy are to receive interest at the rate of 10% p.a. on their capital contribution of $40,000. • Alice will receive a salary of $25,000 for the management of the shop, as well as superannuation contributions of $6,000. • A car will be leased by the business and provided to Alice. • All profits and losses are to be shared equally between the three partners. The accounts for this income year show the following: Income ($) Sales (excluding GST) 240,000 Expenses ($) Cost of goods sold 130,000 Interest on capital paid to Richard and Tracy 8,000 Salary to Alice 25,000 Superannuation to Alice 6,000 Lease payments on car (excluding GST) 7,000 Other deductible operating expenses (excluding GST) 14,000 The leased car was used 80% of the time for business and 20% of the time for private purposes. Required: With reference to the facts above: A.Calculate the net income of the partnership. B.Show the allocation of net income to each of the three partners. C.You must refer to relevant legislation and/or case law in your answer.

Answer 1

Solution: Profit and Loss Appropriations   

Particulars	Amount ($)	Particulars	Amount ($)
To Interest on capital Richard and Tracy	8,000	By Net Profit	96,000
To Alice's Salary	25,000
To super annuation contribution to alice	6,000
To Car lease expenses given to alice	5,600
To Net Profit Transferred to partners	51,400

Allocation of Net Income to each Partner:

ALICE: $17,133

Richard:$ 17,133

Tracy:$17,133

Explanation: Net Profit =Net Sales-Cost of good sold-operating expenses