Running Head: MEMO bb bb bb bb b bb bb b bb bb b bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb b bb bb b bb bb b bb bb b bb bb bb bb bb bb bb b bb bb bb bb bb bb bb bb bb bb
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ACC 405 Final Project Two
ACC 405
SNHU
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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
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Carol
= 50,000 allocated profit
(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
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Payment of Salary
(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
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investor should not get a higher share of the profits or other sharing options. Thus in case,
the 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. bb
(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
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Bob
= 50,000 shared profits
Carol
= 50,000 shared profits
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.
