Running Head: MEMO aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa a aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
aa aa aa aa aa aa aa aa aa aa aa a aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa 1
ACC 405 Final Project Two
ACC 405
SNHU
MEMO aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa 2
Subject: Splitting of profits among the business partners from year one of the business
In the partnership business context, clarity in terms of profit distribution and the
payment of salaried is vital. These elements have the potential to ensure that all the partners
are able to derive value from the business and the partnership concern can function smoothly
(Du et al., 2018). The memo is designed to help a new client involving three partners so
that the first-year profits can be distributed among them.
Allocation of Profits
(A) In the specific partnership business context, the first year’s profits amounting to USD
1,50,000 must be evenly distributed between the three partners. It is because each of the
members is contributing to the partnership in the form of cash, day-to-day business
operations and using experience and attracting new clients. Thus, based on the diverse
contributions made by Alan, Bob, and Carol, they must be allocated USD 50,000 of the
business profits.
(B) If the business profits were allocated evenly among the three partners of the business,
the value of each partner’s capital account at the year-end would be as follows:
Partners
Capital Account Value (in USD)
Alan
= 10,00,000 (investment) +
50,000 allocated profit
=10,50,000
Bob
= 50,000 allocated profit
Carol
= 50,000 allocated profit
MEMO aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa 3
(C) In case an alternative method of profit allocation was adopted where 80 % of the profits
were given to the cash investor, i.e., Alan, and the balance amount was split evenly between
Carol and Bob, then the individual profit share would be as follows:
Partners
Share in profit (in USD)
Alan
= 80 % of 1,50,000 = 1,20,000
Bob
= 10 % of 1,50,000 = 15,000
Carol
= 10 % of 1,50,000 = 15,000
(D) In case the alternative allocation method was adopted in the business context, the value
of each partner’s capital account at the end of the year would vary significantly. The table
presented below captures the new capital account value based on the alternative profit
allocation figures.
Partners
Capital Account Value (in USD)
Alan
= 10,00,000 (investment) + 1,20,000 allocated profit
=11,20,000
Bob
= 15,000 allocated profit
Carol
= 15,000 allocated profit
Payment of Salary
MEMO aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa 4
(A) Partner remuneration is a vital element that must be taken into consideration in the
specific partnership business context. Partners can be categorized into varying types based
on their specific roles. In the partnership, Bob and Carol are active partners since they take
part in the daily operations of the business. On the other hand, Alan is a sleeping or
dormant partner as he does not participate in the usual and daily functioning of the business
(Money and management related articles on finance. Money and management related articles
on finance, 2021). As Bob and Carol work and contribute to normal business operations,
they must receive a salary for their roles. Partners must be given compensation based on
their responsibilities (Palaveev, 2012). Thus, the salary component of the working partners
must be deducted from the profits, and the balance profits must be allocated equally or by
using the alternative method.
(B) If the non-investors received a salary, then their capital account would be impacted since
it would increase owing to the received salary as well as the allocation of profits. Similarly,
if they would make withdrawals from their capital account, then the amount in the account
would be reduced. In case of a potential future liquidation or buyout, the assets would be
distributed among a diverse range of stakeholders. The secured creditors would be the first
to receive their due. Then the unsecured creditors would be given preference, and ultimately,
the remaining assets will be distributed among the partners of the business (Hyndman,
2021).
(C) The share of the profits between the cash investor and the working partners must be
based on the specific partnership agreement that has been agreed upon. So, the cash investor
should not get a higher share of the profits or other sharing options. Thus in case, the
MEMO aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa 5
agreement does not consider the investment of 1 million by Alan, it is immaterial while
sharing profits.
(D) In case the cash investor would get a salary, his capital account would be impacted
since his new capital account would be USD 10,24,000. The amount includes his initial
investment and salary worth USD 24,000. In case there is a potential future liquidation or
buyout, Alan’s capital account will have a higher balance as compared to that of Carol and
Bob since it includes the investment amount.
(E) The payment of salary to the partners and the allocation of profit would have a major
impact on the partnership’s entries and its financial bottom line. As the profits would be
distributed among the partners, the bottom line of the business would decline. aa
(F) For increasing the effectiveness of salary payments and profit allocation for the three
partners, even and fair distribution approach must be adopted. A scenario to ensure fair
compensation for all the three partners is presented where Carol and Bob must receive salary
as compensation for their involvement in daily operations, and Alan must be given interest
for his investment contribution.
(G) If the proposed fair allocation method was followed, the value of every partner’s capital
account at the year-end would be as follows:
Partners
Capital Account Value (in USD)
Alan
= 1,50,000 + 50,000 interest and shared profits
along with investment of 1 million
Bob
= 50,000 shared profits
MEMO aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa 6
Carol
= 50,000 shared profits
Thank You
References
Du, J., Wu, H., & Zhu, L. (2018). Influencing factors on profit distribution of public-private
partnership projects: private sector’s perspective. Advances in Civil Engineering, 2018.
Hyndman, K. (2021). Dissolving partnerships under risk: An experimental investigation.
Journal of Economic Behavior & Organization, 185, 702-720.
Money and management related articles on finance. Money and management related articles
on financ. (2021). Retrieved August 12, 2022, from https://accountlearning.com/types-
of-partners-in-a-business-partnership/
Palaveev, P. (2012). Partner Responsibilities and Partner Compensation.
10.1002/9781118531914.ch6.
