ld be required to do the same. Interest is paid on partner’s capital accounts at an annual rate of 5%. Leonard is being offered the choice between two arrangements for the allocation of the profits after payment of interest on partners’ capital accounts. Option a Leonard would be paid a salary of £30,000 per annum and he would be entitled to 20%
Partnership Accounting
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings, admission of a new partner, etc.
Partner Admission and Withdrawal
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings of a partner, etc.
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Leonard has been invited by Jane and Tarik to join their partnership.
Total partnership profits for each of the next few years are expected to be in the region of £187,500 per annum. Jane and Tarik each introduced capital of £50,000 into the business and Leonard would be required to do the same. Interest is paid on partner’s capital accounts at an annual rate of 5%.
Leonard is being offered the choice between two arrangements for the allocation of the profits after payment of interest on partners’ capital accounts.Option a
Leonard would be paid a salary of £30,000 per annum and he would be entitled to 20% of residual profits i.e. a profit-sharing ratio of 4:4:2 would apply, with Leonard receiving the smaller share. Neither Jane nor Tarik would be paid a salary.
Option b
Leonard would not be paid a salary and the residual profit would be shared equally by the 3 partners.You are required to compute Leonard’s total share of profit under each option and to discuss the factors he should consider in making his decision.
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