16 Fischer 10e Ch13 TB

Accounting for Special Transactions (CMPC 131)

Chapter 13—Partnerships: Characteristics, Formation, and Accounting for Activ-

ities

MULTIPLE CHOICE

1. Which of the following is NOT a characteristic of the proprietary theory that influences accounting for
partnerships?
a. Partners' salaries are viewed as a distribution of income rather than a component of net in-
come.
b. A partnership is not viewed as a separate, distinct, taxable entity.
c. A partnership is characterized by limited liability.
d. Changes in the ownership structure of a partnership result in the dissolution of the partner-
ship.
ANS: C DIF: M OBJ: 13-1

2. Which of the following would be least likely to be used as a means of allocating profits among part-
ners who are active in the management of the partnership?
a. Salaries
b. Bonus as a percentage of net income before the bonus
c. Bonus as a percentage of sales in excess of a targeted amount
d. Interest on average capital balances
ANS: D DIF: E OBJ: 13-4

3. Which of the following best describes the use of interest on invested capital as a means of allocating
profits?
a. If interest on invested capital is used, it must be used for all partners.
b. Interest is allocated only if there is partnership net profit.
c. Invested capital balances are never affected by drawings of the partnerships.
d. Use of beginning or ending measures of invested capital may be subject to manipulation
that distorts the measure of invested capital.
ANS: D DIF: E OBJ: 13-4

4. A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus alloca-
tion, interest on capital, with any remainder to be allocated by preset ratios. If a partnership has a loss
to allocate, generally which of the following procedures would be applied?
a. Any loss would be allocated equally to all partners.
b. Any salary allocation criteria would not be used.
c. The bonus criteria would not be used.
d. The loss would be allocated using the profit and loss ratios, only.
ANS: C DIF: M OBJ: 13-4

5. Ace & Barnes partnership has income of $110,000 and Partner A is to be allocated a bonus of 10% of
income after the bonus, Partner A's bonus would be ____.
a. $11,000
b. $10,000
c. $9,091
d. $9,000
ANS: B DIF: M OBJ: 13-4

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 6. Partner A first contributed $20,000 of capital into an existing partnership on February 1, 2008. On June
1, 2008, the partner contributed another $20,000. On September 1, 2008, the partner withdrew $15,000
from the partnership. Withdrawals in excess of $5,000 are charged to the partner's capital account. The
partnership's fiscal year end is December 31. The annual weighted-average capital balance is ____.
a. $25,000
b. $26,667
c. $28,334
d. $30,000
ANS: B DIF: M OBJ: 13-3 | 13-4
7. Partner Alta had a capital balance on January 1, 2008 of $45,000 and made additional capital contribu-
tions during 2008 totaling $50,000. During the year 2008, Alta withdrew $8,000 per month. Alta's
post-closing capital balance on December 31, 2008 is $30,000. Alta's share of 2008 partnership income
is ____.
a. $96,000
b. $50,000
c. $31,000
d. $8,000
ANS: C DIF: M OBJ: 13-3 | 13-4
8. Partners A and B have a profit and loss agreement with the following provisions: salaries of $20,000
and $25,000 for A and B, respectively; a bonus to A of 10% of net income after bonus; and interest of
20% on average capital balances of $40,000 and $50,000 for A and B, respectively. Any remainder is
split equally. If the partnership had net income of $88,000, how much should be allocated to Partner
A?
a. $36,000
b. $44,500
c. $50,000
d. $43,500
ANS: B DIF: M OBJ: 13-4
9. Partners A and B have a profit and loss agreement with the following provisions: salaries of $30,000
and $45,000 for A and B, respectively; a bonus to A of 12% of net income after salaries and bonus; and
interest of 10% on average capital balances of $50,000 and $65,000 for A and B, respectively. One-
fourth of any remaining profits are allocated to A and the balance to B. If the partnership had net in-
come of $108,600, how much should be allocated to Partner A?
a. $43,225
b. $43,816
c. $47,850
d. $65,375
ANS: A DIF: M OBJ: 13-4
10. Partners A and B have a profit and loss agreement with the following provisions: salaries of $40,000
and $45,000 for A and B, respectively; a bonus to A of 10% of net income after salaries and bonus; and
interest of 15% on average capital balances of $40,000 and $60,000 for A and B, respectively. One-
third of any remaining profits or losses are allocated to B and the balance to A. If the partnership had
net income of $52,000, how much should be allocated to Partner A?
a. $14,000
b. $30,000
c. $38,000
d. None of the above
ANS: B DIF: M OBJ: 13-4
11. Partners Acker, Becker & Checker have the following profit and loss agreement:

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 (1) Acker & Becker receive salaries of $40,000 each
(2) Checker gets a bonus of 10 percent of net income after salaries and bonus (the bonus is
zero if salaries exhaust net income)
(3) Remaining profits are shared by Acker, Becker & Checker in the following ratios respec-
tively: 3:4:3.

The partnership had a net income of $91,000. How much should be allocated to Checker?
a. $3,300
b. $10,300
c. $1,000
d. $4,000
ANS: D DIF: D OBJ: 13-4

12. Partners A and B have a profit and loss agreement with the following provisions: salaries of $41,600
and $38,400 for A and B, respectively; a bonus to A of 10% of net income after salaries and bonus; and
interest of 10% on average capital balances of $20,000 and $35,000 for A and B, respectively. One-
third of any remaining profits are allocated to A and the balance to B. If the partnership had a net in-
come of $36,000, how much should be allocated to Partner A, assuming that the provisions of the
profit and loss agreement are ranked by order of priority starting with salaries?
a. $12,000
b. $18,000
c. $18,720
d. $41,600
ANS: C DIF: D OBJ: 13-4

Scenario 13-1
Partners Tuba and Drum share profits and losses of their partnership equally after 1) annual salary al-
lowances of $25,000 for Tuba and $20,000 for Drum and 2) 10% interest is provided on average capi-
tal balances. During 2008, the partnership had earnings of $50,000; Tuba's average capital balance was
$60,000 and Drum's average capital balance was $90,000.

13. Refer to Scenario 13-1. How should the $50,000 of earnings be divided?

Tuba Drum
a. $26,000 $24,000
b. $27,000 $23,000
c. $25,000 $25,000
d. $27,500 $22,500

ANS: A DIF: M OBJ: 13-4

14. Refer to Scenario 13-1. What would be the correct answer if an order of priority was in the partnership
agreement whereby salary allowances have a higher priority than interest on capital allocations?

Tuba Drum
a. $26,000 $24,000
b. $27,000 $23,000
c. $25,000 $25,000
d. $27,500 $22,500

ANS: B DIF: M OBJ: 13-4

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15. Which of the following statements is true concerning the treatment of salaries in partnership account-
ing?
a. Partner salaries may be used to allocate profits and losses; they are not considered ex-
penses of the partnership
b. Partner salaries are equal to the annual partner draw.
c. The salary of a partner is treated in the same manner as salaries of corporate employees.
d. Partner salaries are directly closed to the capital account.
ANS: A DIF: E OBJ: 13-3

16. Partners active in a partnership business should have their share of partnership profits based on the fol-
lowing
a. a combination of salaries plus interest based on average capital balances.
b. a combination of salaries and percentage of net income after salaries and any other alloca-
tion basis.
c. salaries only.
d. percentage of net income after salaries is paid to inactive partners.
ANS: B DIF: E OBJ: 13-4

17. Which of the following statements are true when comparing corporations and partnerships?
a. Partnership entities provide for taxes at the same rates used by corporations.
b. In theory, partnerships are more able to attract capital.
c. Like corporations, partnerships have an infinite life.
d. Unlike shareholders, general partners may have liability beyond their capital balances.
ANS: D DIF: M OBJ: 13-1

18. Partnership drawings are

a. always maintained in a separate account from the partner's capital account.
b. equal to partners' salaries.
c. usually maintained in a separate draw account with any excess draws being debited di-
rectly to the capital account.
d. not discussed in the specific contract provisions of the partnership.
ANS: C DIF: E OBJ: 13-3

19. Maxwell is trying to decide whether to accept a salary of $60,000 or a salary of $25,000 plus a bonus
of 20% of net income after the bonus as a means of allocating profit among the partners. What amount
of income would be necessary so that Maxwell would consider the choices to be equal?
a. $35,000
b. $85,000
c. $140,000
d. $210,000
ANS: D DIF: D OBJ: 13-4

20. Maxwell is trying to decide whether to accept a salary of $60,000 or a salary of $25,000 plus a bonus
of 20% of net income after salaries and bonus as a means of allocating profit among the partners.
Salaries traceable to the other partners are estimated to be $75,000. What amount of income would be
necessary so that Maxwell would consider the choices to be equal?
a. $175,000
b. $210,000
c. $285,000
d. $310,000
ANS: D

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 Maxwell needs a $35,000 bonus to equate the “salary plus bonus” package to the “salary only” pack-
age
Using bonus formula to solve for income:
Bonus = .2(Income – Bonus – Salary)
35,000 = .2Income – [.2  35,000] – [.2  100,000*]
62,000 = .2Income
310,000 = income
*salaries 25,000 + 75,000
DIF: D OBJ: 13-4

21. Maxwell is a partner and has an annual salary of $30,000 per year, but he actually draws $3,000 per
month. The other partner in the partnership has an annual salary of $40,000 and draws $4,000 per
month. What is the total annual salary that should be used to allocate annual net income among the
partners?
a. $14,000
b. $50,000
c. $70,000
d. $84,000
ANS: C DIF: D OBJ: 13-4

22. A partnership has the following accounting amounts:

(1) Sales $70,000

(2) Cost of Goods Sold = $40,000
(3) Operating Expenses = $10,000
(4) Salary allocations to partners = $13,000
(5) Interest paid to banks = $2,000
(6) Partners' withdrawals = $8,000

Partnership net income (loss) is ____.

a. $20,000
b. $18,000
c. $5,000
d. $(3,000)
ANS: B DIF: E OBJ: 13-1

23. Which of the following characteristics of a partnership most likely explains why a public accounting
firm is organized as a partnership from a public policy viewpoint?
a. A partnership is not a taxable entity.
b. A partnership is characterized by unlimited liability.
c. A partnership is characterized by a fiduciary relationship among the partners.
d. Salaries to the partners are not considered a component of net income.
ANS: B DIF: M OBJ: 13-1

24. For financial accounting purposes, assets of an individual partner contributed to a partnership are
recorded by the partnership at
a. historical cost.
b. book value.
c. fair market value.
d. lower of cost or market.
ANS: C DIF: E OBJ: 13-3

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25. Which of the following is not an advantage of a partnership over a corporation?
a. Ease of formation
b. Unlimited liability
c. The elimination of taxes at the entity level
d. All of the above
ANS: B DIF: E OBJ: 13-1

26. Under the entity theory, a partnership is

a. viewed through the eyes of the partners.
b. viewed as having its own existence apart from the partners.
c. a separate legal and tax entity.
d. unable to enter into contracts in its own name.
ANS: B DIF: M OBJ: 13-1

PROBLEM

1. Carey and Drew formed a partnership on January 1, 2008. Carey invested $100,000, Drew $70,000.
Each withdrew $12,000 on each of the following dates during 2008: February 1, August 1, and No-
vember 1. These withdrawals in total were equal to salaries for the year. Interest of 8 percent was to be
paid partners on the basis of their average capital balances excluding net income. Additionally, Carey
was to get a 20 percent bonus based on partnership net income after the bonus, but before the salaries
and interest.

Any remaining profit (or loss) was to be allocated equally among the partners.

Required:

If partnership net income was $150,000, how was it to be allocated between Carey and Drew?

Order of allocation: bonus, salaries, interest. Round to the nearest whole dollar.

ANS:
Total Carey Drew
Total to allocate: $150,000
As Bonus (Note A below) (25,000) $25,000
As Salaries (72,000) 36,000 $36,000
As Interest (Note B below) (10,720) 6,560 4,160
Subtotal: $ 42,280 $67,560 $40,160
Residual Profit-sharing (42,280) 21,140 21,140
Final Allocations: $ 0 $88,700 $61,300

Note A (Bonus):
Bonus = .20(Net Income Bonus)
1.2Bonus = .20($150,000)
1.2Bonus = 30,000
Bonus = $25,000

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 Note B (Interest):
Capital Fraction Interest
Carey: Amount of Year Rate = Subtotal
$100,000 1/12 0.08 $ 667
(12,000)
88,000 6/12 0.08 3,520
(12,000)
76,000 3/12 0.08 1,520
(12,000)
$ 64,000 2/12 0.08 853
1.0000 $6,560

Capital Fraction Interest

Drew: Amount of Year Rate = Subtotal
$70,000 1/12 0.08 $ 467
(12,000)
58,000 6/12 0.08 2,320
(12,000)
46,000 3/12 0.08 920
(12,000)
$34,000 2/12 0.08 453
1.0000 $4,160
DIF: M OBJ: 13-4
2. Matt and Jeff organized their partnership on 1/1/00. The following entries were made into their capital
accounts during 00:
Matt
Debit Credit Balance
1/1 35,000 35,000
6/1 10,000 45,000
10/1 5,000 50,000

Jeff
1/1 25,000 25,000
3/1 10,000 35,000
9/1 10,000 25,000
11/1 5,000 20,000
12/1 8,000 28,000
If partnership profits for the year equaled $66,000, indicate the allocations between the partners under
the following independent profit-sharing allocation conditions:

a. Interest of 10% is allocated on weighted average capital balance and the remainder is di-
vided equally

b. A salary of $9,000 will be allocated to Jeff; 10% interest on ending capital is allocated to
the partners; remainder is divided 60/40 to Matt and Jeff, respectively

c. Salaries are allocated to Matt and Jeff in the amount of $10,000 and $15,000, respectively
and the remainder is allocated in proportion to weighted average capital balances

d. A bonus of 10% of partnership profits after bonus is credited to Matt, a salary of $35,000
is allocated to Jeff, a $20,000 salary is allocated to Matt, 10% interest on weighted capital
is allocated, and remainder is split equally

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ANS:
Weighted Average Capital Calculation:

Matt
Cap Bal # months Gross Cap
1/1 to 6/1 35,000 5 175,000
6/1 to 10/1 45,000 4 180,000
10/1 to 12/31 50,000 3 150,000
Total 505,000
Average 42,083

Jeff
Cap Bal # months Gross Cap
1/1 to 3/1 25,000 2 50,000
3/1 to 9/1 35,000 6 210,000
9/1 to 11/1 25,000 2 50,000
11/1 to 12/1 20,000 1 20,000
12/1 to 12/31 28,000 1 28,000
Total 358,000
Average 29,833

a. Matt Jeff Total

Salary $ N/A $ N/A $ 0
Bonus N/A N/A 0
Interest 4,208 2,983 7,191
Subtotal $ 4,208 $ 2,983 $ 7,191
Remainder 29,404 29,405 58,809
Total $33,612 $32,388 $66,000

b. Matt Jeff Total

Salary $ 0 $ 9,000 $ 9,000
Bonus N/A N/A 0
Interest 5,000 2,800 7,800
Subtotal $ 5,000 $11,800 $16,800
Remainder 29,520 19,680 49,200
Total $34,520 $31,480 $66,000

c. Matt Jeff Total

Salary $10,000 $15,000 $25,000
Bonus N/A N/A 0
Interest N/A N/A 0
Subtotal $10,000 $15,000 $25,000
Remainder 23,992 17,008 41,000
Total $33,992 $32,008 $66,000

d. Matt Jeff Total

Salary $20,000 $35,000 $55,000
Bonus* 6,000 N/A 6,000
Interest 4,208 2,983 7,191
Subtotal $30,208 $37,983 $68,191
Remainder (1,096) (1,095) (2,191)
Total $29,112 $36,888 $66,000
DIF: M OBJ: 13-4

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3. Olsen and Katch organized the OK Partnership on 1/1/01. The following entries were made into their
capital accounts during 01:
Olsen
Debits Credits
1/1 20,000
4/1 5,000
10/1 5,000

Katch
1/1 40,000
3/1 10,000
9/1 10,000
11/1 10,000

The partnership agreement called for the following in the allocation of partnership profits and losses:

Salaries of $48,000 and $36,000 would be allocated to Olsen and Katch, respectively

Interest of 8% on average capital balances will be allocated

Katch will receive a bonus of 10% on all partnership billings in excess of $300,000

Any remaining profits/losses will be allocated 60/40 to Olsen and Katch, respectively.

Required (account for each situation independently):

a. Determine the distribution of partnership net income. Assume the following priority of al-
location: interest, bonus, salaries, then remaining assuming partnership income of $85,000;
partnership billings amounted to $400,000

b. Determine the distribution of partnership net income of $165,000 on billings of $400,000.

No specific priority is given to any of the allocation criteria.

ANS:
a. Olsen Katch Total Remainder
Available 85,000
Interest $ 2,000 $ 2,400 $ 4,400 80,600
Bonus 10,000 10,000 70,600
Salaries 40,343 30,257 70,600 0
Subtotals: $42,343 $42,657 $85,000

Weighted Average Calculation:

Olsen:
Capital Gross
Balance # of Months Capital
1/1 to 4/1 20,000 3 60,000
4/1 to 10/1 25,000 6 150,000
10/1 to 12/31 30,000 3 90,000
Total 300,000
Average 25,000

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 Katch:
Capital Gross
Balance # of Months Capital
1/1 to 3/1 40,000 2 80,000
3/1 to 9/1 30,000 6 180,000
9/1 to 11/1 20,000 2 40,000
11/1 to 12/31 30,000 2 60,000
Total 360,000
Average 30,000

$70,600 is not sufficient to cover entire salary allocation. It is split between Olsen and Katch
based on proportionate salaries:

Olsen 48,000 ÷ 84,000  70,600 = 40,343

Katch 36,000 ÷ 84,000  70,600 = 30,257

b. Olsen Katch Total

Salaries $48,000 $36,000 $ 84,000
Bonus 10,000 10,000
Interest* 2,000 2,400 4,400
Subtotals: 50,000 48,400 98,400
Remainder 39,960 26,640 66,600
Final Profit: $89,960 $75,040 $165,000

*see part 'a' solution for weighted average capital calculation

DIF: D OBJ: 13-4

4. Cable and Jones are considering forming a partnership whereby profits will be allocated through the
use of salaries and bonuses. Bonuses will be 10% of net income after total salaries and total bonuses.
Cable will receive a salary of $30,000 and a 10% bonus. Jones has the option of receiving a salary of
$40,000 and a 10% bonus or simply receiving a salary of $52,000.

Required:

Determine the level of income that would be necessary so that Jones would be indifferent to the profit-
sharing option selected.

ANS:
Jones would have to receive a bonus of $12,000 to be indifferent to the two profit-sharing options.
Since Cable would receive the same bonus, the total bonus would have to be $24,000. Therefore,

$24,000 = 10%  (Net income - Salaries - Bonuses)

$24,000 = 10%  (Net income - [30,000 + 40,000] - 24,000)
$24,000 = 10%  (Net income - 94,000)
$24,000 = 10%  Net income - 9,400
$33,400 = 10%  Net income
Net income $334,000

DIF: E OBJ: 13-4

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5. Tupper and Tolin have decided to form a partnership to provide environmental testing services to in-
dustry. The individuals will share profits equally and have conveyed the following assets and liabilities
to the partnership:

Tupper Tolin
Cash $20,000
Equipment basis 12,000 34,000
Vehicles basis 6,000
Liabilities 8,000 20,000

Required:

Calculate the book basis of each partner in the partnership.

ANS:
TUPPER TOLIN
Cash $20,000
Equipment 12,000 $ 34,000
Vehicles 6,000
Liabilities (8,000) (20,000)
Basis of partner's interest $24,000 $20,000

DIF: M OBJ: 13-4 | 13-5

6. Van and Shapiro formed a partnership. As part of the formation, Van contributed equipment whose cost
to her was $60,000, with accumulated depreciation for tax purposes of $36,000. The partnership
awarded her $40,000 towards her partnership interest for the equipment. The partnership assumed
$10,000 of Shapiro's personal debts when she was admitted into the partnership.

After one year of operation, the partnership had the following partial trial balance:

Debit Credit
Van, Capital 70,000
Shapiro, Capital 95,000
Van, Withdrawals 15,000
Shapiro, Withdrawals 14,000
Service Revenue 300,000
Salaries Expense (to employees) 100,000
Rent Expense 36,000
Supplies Expense 28,000
Other Operating Expenses 15,000

Partners split profits as follows:

(1) A salary of $30,000 is paid to Van.

(2) Remaining profits (or losses) are split 40% to Van, the remainder to Shapiro.

Required:

Calculate the two partners' ending capital balances.

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 ANS:
Total Van Shapiro
Allocation of Net Income: $300,000
(100,000)
(36,000)
(28,000)
(15,000)
$121,000
Allocation of Salary: (30,000) $30,000
Subtotal: $ 91,000 $30,000 $ 0
Sharing of Remainder 40:60 (91,000) 36,400 54,600
Allocation of Net Income: $ 0 $66,400 $54,600

Partners' Capital Total Van Shapiro

Capital, Beginning $165,000 $ 70,000 $ 95,000
Net Income 121,000 66,400 54,600
Less: Withdrawals: (29,000) (15,000) (14,000)
Capital, Ending $257,000 $121,400 $135,600

DIF: D OBJ: 13-3 | 13-5

7. The Amato, Bergin, Chelsey partnership profit allocation agreement calls for salaries of $15,000 and
$30,000 for Amato & Bergin, respectively. Amato is also to receive a bonus equal to 10% of partner-
ship income after her bonus. Interest at the rate of 10% is to be allocated to Chelsey based on his
weighted average capital after draws. Chelsey began the current year with a capital balance of $54,000
and had the following subsequent activity:

March 1 Withdraw $20,000

July 1 Withdraw $10,000
September 1 Contribute $5,000
October 1 Contribute $12,000

Required:

Assuming the partnership has income of $66,000, determine the amounts to be allocated to each part-
ner.

ANS:
Amato Bergin Chelsey Total Distrib Bal to Dist
Net income 66,000
Salaries 15,000 30,000 - 45,000 21,000
Bonus 6,000 6,000 15,000
Interest 3,700 3,700 11,300
Bal equally 3,767 3,767 3,766 11,300 -
24,767 33,767 7,466 66,000

Bonus: = 10% (66,000 Bonus)

= 6,000

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 Interest:
months weighted
beg bal 54,000 2 9,000
(20,000) 34,000 4 11,333
(10,000) 24,000 2 4,000
5,000 29,000 1 2,417
12,000 41,000 3 10,250
37,000  10% = 3,700

DIF: E OBJ: 13-7

8. Turner, Ike, and Gibson formed a partnership in 2009 that provided for each member to receive a
salary of $20,000. Gibson was to receive a bonus of 10% of partnership income after the bonus. Inter-
est on ending capital balances of 10% was also used as a component for allocating profits to Turner
and Gibson. Any remaining profits/losses were to be allocated 30%, 30%, and 40% for Turner, like,
and Gibson, respectively. In early 2010, it was discovered that the 2009 income of $54,000 was over-
stated by $22,000. Turner and Gibson suggest that the error be offset against the 2010 income. Ike ar-
gued that they are being harmed by this decision. Discuss the merits of Ike's position.

ANS:
The error would have no effect on the amount of salaries allocated to the partners. However, Gibson's
bonus in 2009 is overstated by $2,000. (Bonus error 10%/[$22,000 error bonus error]). As a result
of this overstatement, the deficit (resulting form the allocation of salaries, bonus, and interest) is over-
stated and Turner and Ike must absorb this share of this overstatement. Gibson, however, receives
$2,000 more than she should and absorbs only $800 ($2,000 40%) of the resulting deficit. The fail-
ure to correct the error in 2009 will also unfairly affect the interest on capital for 2010. Although the
error has no effect on the 2009 capital balances used, these balances are in total overstated by $22,000
at the end of 2010. The decision to offset the error against 2010 income versus beginning 2010 capital
balances will result in allocating an overstated amount of interest to Turner and Gibson in 2010. Fi-
nally, to the extent that drawings may be related to capital balances, a time value of money factor must
be considered.

DIF: E OBJ: 13-4

ESSAY

1. Barnes and Noble, both lawyers, have decided to form a partnership. They have asked your advice on
how the profits and losses should be divided and have provided you with the following information:

Initial Capital Contribution:

Barnes $20,000
Noble $80,000
Time Devoted to Business Operations:
Barnes 75%
Noble 100%

Personal facts:
Barnes has an excellent reputation in the community and is very well known. Substantially all new
client will come from her efforts.
Noble has a very strong technical and operational background, and is an excellent supervisor of staff
lawyers who are expected to do more of the legal research and initial preparation of legal documenta-
tion.

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Required:
How would you advise the partners to share in profits and losses?
ANS:
There are several aspects of this new partnership which will guide how the profit and loss allocation
should be set up. Since the partners have such diverse contributions to the partnership, a strict or equal
percentage would probably not be in the best interests of either partner as an allocation method. Since
both partners are contributing a considerable amount of their time to the partnership, there is sufficient
reason to allocate a portion of profits using a salary allocation. In a law firm, the allocation could be a
flat amount based on estimated value of time spent, or it could be dependent upon billable hours. Since
Noble is probably going to spend more time on administrative functions, versus billable functions, a
straight salary might be more logical. In addition, since Barnes' main purpose is to bring in the clients,
some sort of bonus to Barnes would seem appropriate, corresponding to new client revenue or hours.
Finally, due to the disparity in contributed capital, it would probably be advisable for there to be some
sort of interest on capital allocation to provide a return on Noble's significant investment into the part-
nership.
DIF: M OBJ: 13-1 | 13-2

13-14

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