Required: A. Assume Mc Starns retires with his $75,000 settlement, and Alan is admitted to the partnership as proposed. (1) Prepare journal entries to record the retirement and admission (2) Discuss the factors Alan needs to consider in evaluating whether he has improved his annual compensation from the firm. Although this is not a tax course, include a discussion of the various tax issues. (3) Should Alan be concerned regarding the impending retirement and settlement of Mr. Stars' capital account assuming Alan is confident that he will be able to match the revenue generating ability of Mr. Stams?
PROBLEM 16-8
Discussion Case with Ethical Issue
Alan Norwood is currently a senior associate with the law firm of Butler, Starns, and Madden (BSM). His compensation currently includes a salary of $155,000, and benefits valued at $5,000. BSM is considered among the strongest of local firms, with assets of $10 million (cash $2,000,000, and accounts receivables $8,000,000), liabilities of $7.5 million, and 11 partners.
Alan anticipates admission to the
1. A5% interest in BSM capital and profits in recognition of Alan's commitment to the firm and in exchange for a capital investment by Alan of $150,000. This 5% interest would be acquired from the other partners.
2. Alan's compensation will consist of a monthly withdrawal of $18,000 and benefits valued at $5,000 annually. Monthly withdrawals approximate firm profits, but any unpaid profits will be distributed as a bonus to Alan after the end of each partnership year.
On March 1, only one month prior to Alan's final negotiation meeting for entry into the partnership. Mary, one of the junior associates, discreetly informed Alan that the firm was drawing up documents for Hugh Stars' retirement. Hugh has an interest in the firm's capital and profits with a book value of $125,000. The partners have agreed upon a $75,000 cash settlement of the interest held by Mr. Starns. (Of the other 10 partners, numbers 1 through 9 hold 10% interests, and number 10 holds a 5% interest).
Required:
A. Assume Mc Starns retires with his $75,000 settlement, and Alan is admitted to the partnership as proposed.
(1) Prepare
(2) Discuss the factors Alan needs to consider in evaluating whether he has improved his annual compensation from the firm. Although this is not a tax course, include a discussion of the various tax issues.
(3) Should Alan be concerned regarding the impending retirement and settlement of Mr. Stars' capital account assuming Alan is confident that he will be able to match the revenue generating ability of Mr. Stams?
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