Question

Question 3

Zilky and Justin formed a partnership on December 31, 2013. Zilky contributed $50,000 cash and accounts receivable with a fair market value of $10,000. Justin's investment consisted of: cash, $5,000; inventory, $34,000; and supplies, $1,000-all at fair market values. Profit for 2014 and 2015 was $50,000 and $65,000, respectively.

Calculate the allocation of profit for 2014 and 2015, assuming profits are divided as follows:

(A) The partners have no agreement.
(B) Based on a 1:3 ratio.
(C) Based on the ratio of the partners' original investments.

Answer 1

A) WHEN THE PARTNERS HAVE NO AGREEMENT THE PROFITS MUST BE SHARED BY THEM IN EQUAL PROPORTIONS. THUS IN 2014 ZILKY AND JUSTIN WILL SHARE PROFITS @ 50000 * 50% ie $25000 EACH AND IN 2015 THEY WILL SHARE PROFITS @ 65000 * 50% ie $32500 EACH.

B) WHEN PROFITS ARE SHARED IN 1:3 RATIO

2014

ZILKY = 50000 * 1/4 = $12500

JUSTIN = 50000 * 3/4 = $37500

2015

ZILKY = 65000 * 1/4 = $16250

JUSTIN = 65000 *3/4 = $48750.

C) BASED ORIGINAL INVESTMENT

ZILKY CONTRIBUTED $50000 CASH AND $10000 ACCOUNTS RECEIVABLES. TOTAL AMOUNT CONTRIBUTED = $60000.

JUSTIN CONTRIBUTED $5000 CASH, $34000 INVENTORY AND $1000 SUPPLIES. TOTAL CONTRIBUTION = $40000.

RATIO = 60000:40000 = 6:4 = 3:2.

2014

ZILKY = 50000 * 3/5 = $30000

JUSTIN = 50000 * 2/5 = $20000

2015

ZILKY = 65000 * 3/5 = $39000

JUSTIN = 65000 * 2/5 = $26000.