Quiz 14: Partnerships: Formation and Operation

Business

Write a Memo to these three partners suggesting the ways allocating the profits of the firm: Date: July 9, 2015, Place: U.K.K. To The Partners, XYZ Partnership firm, U.K.S. Subject: Suggesting the ways allocating the profits of the firm. In general, Articles of partnership states the profit and loss sharing ratio along with other matters which include capital contribution, rights and responsibilities of the partners, name and address and description and nature of the business. Profits of the partnership firm can be allocated to the partners according to the agreed ratio (ratio states by the Articles) or Equal ratio. Profits can also be allocated to the partners based on their activities in the partnership firm. In the present case, BW is not an active partner (sleeping partner) but remaining partners EH and HP are active partners. The role of partner BW is just investing and if his investment is not material, his profit sharing ratio is less than other two partners. In detail, the performance of EH and HP leads to major contribution of the profits these two partners are entitled for higher profit sharing ratio. It is recommended that profit sharing ratio of EH and HP should be in equal proportion but must be more than profit sharing ratio of BW. Yours sincerely, CPA, SSK.

Write a report for the two individuals outlining the types of situations which states the corporation form of legal structure would be best choice: Legal businesses are many types which include Limited Liability Company (LLC), Limited Liability Partnership (LLP), Partnerships and Corporations. The advantages of Corporation are that it can raise capital easily by issuing shares or bonds. Corporations are separate from its owners and therefore losses will not be transfer to its members but faced by corporations itself. Corporation form of legal structure can have better ability to raise funds from public. Corporations can carry forward its losses to future years to get tax benefit by setting off previous year losses. Therefore, taxable income of corporation would be reduced. As a result, low tax payment. By considering the above mentioned factors and advantages corporation form of legal structure would be best choice.

There are a number of different ways that a spreadsheet could be created to solve this particular problem. Here is one possible approach: In Cell A1, enter label text "Net Income" and in Cell B1 enter $200,000. In Cell A2, enter label text "Billable Hours - Red" and in Cell B2 enter 2,000. In Cell C2, enter the hourly rate of $20. In Cell A3, enter label text "Billable Hours - Blue" and in Cell B3 enter 1,500. In Cell C3, enter the hourly rate of $30. In Cell A4, enter label text "Investment - Red" and in Cell B4 enter $80,000. In Cell C4, enter the rate of return of 10%. In Cell A5, enter label text "Investment - Blue" and in Cell B5 enter $50,000. In Cell C5, enter the rate of return of 10%. Perform calculations: In Cell D2, enter formula to multiply number of hours by hourly rate. Formula: =+B2*C2 The formula for the next three line items is identical to this first formula; copy the formula to Cells D3, D4, and D5. (To copy a formula across a range of cells, select the cell containing formula, then drag the fill handle, which is the small square in the lower right corner of this box, over the adjacent cells. Note that the formula will adjust automatically for the different lines.) In Cell A6, enter label text "Subtotal" and SUM the amounts in Cells D2 through D5. Click in Cell D6, press the symbol on the standard toolbar. Click and drag across the range of cells to be summed (D2 through D5) and press enter. Subtract the subtotal of the partner's initial allocations (Cell D6) from the Net Income (Cell B1) with the following formula: In Cell A8, enter the label text "Profit to be Split" and in Cell D8, enter the following formula: =+B1-D6. Determine the distribution of Profit between partners: In Cell A10, enter label text "Profit - Red" and in Cell C10 enter "50%". In Cell A11, enter label text "Profit - Blue" and in Cell C11 enter "50%". Perform calculations: In Cell D10, enter formula to multiply Profit to be Split (Cell D8) by distribution percentage (Cell C10). Formula: =+D8*C10 Repeat this calculation for the other partner. In Cell D11, enter the formula: =+D8*C11 Once this spreadsheet has been created, any of the variables may be changed and the results will adjust automatically. There are eleven variables that can be changed: B1, B2, B3, B4, B5, C2, C3, C4, and C5, as well as C10 and C11 (which must add up to 100%).

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