Question

Arnold (A), Bower (B), and Chambers (C) are partners in a small manufacturing firm whose net assets are as follows:
The partnership agreement calls for the allocation of profits and losses as follows:
a. Salaries to A, B, and C of $30,000, $30,000, and $40,000, respectively.
b. Bonus to A of 10% of net income after the bonus.
c. Remaining amounts are allocated according to profit and loss percentages of 50%, 20%, and 30% for A, B, and C, respectively.
Unfortunately, the business finds itself in difficult times: Annual profits remain flat at approximately $132,000, additional capital is needed to finance equipment which is necessary to stay competitive, and all of the partners realize that they could make more money working for someone else, with a lot fewer headaches.
Chambers has identified Dawson (D) as an individual who might be willing to acquire an interest in the partnership. Dawson is proposing to acquire a 30% interest in the capital of the partnership and a revised partnership agreement, which calls for the allocation of profits as follows:
a. Salaries to A, B, C, and D of $30,000, $30,000, $40,000, and $30,000, respectively.
b. Bonus to D of $20,000 if net income exceeds $250,000.
c. Remaining amounts are allocated according to profit and loss percentages of 30%, 10%, 30%, and 30% for A, B, C, and D, respectively.
An alternative to admitting a new partner is to liquidate the partnership. Net personal assets of the partners are as follows:
Required
Assuming that you are Bower’s personal CPA, you have been asked to provide your client with your opinions regarding the alternatives facing the partnership.
1. Bower does not believe it would be worth it to him to admit a new partner unless his allocation of income increased by at least $10,000 over that which existed under the original partnership agreement. What would the average annual profit of the new partnership have to be in order for Bower to accept the idea of admitting a new partner?
2. Given the net assets of the original partnership, what is the suggested purchase price that Dawson should pay for a 30% interest in the partnership?
3. Assume that the original partnership was liquidated and Bower received a business vehicle, with a fair value of $15,000 and a net book value of $20,000, as part of his liquidation proceeds. Partners with a deficit capital balance will only contribute their net personal assets.
How much additional cash would Bower receive if the partnership were liquidated?


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  • CreatedApril 13, 2015
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