J. Nitty and G. Gritty are considering the formation of a partnership to operate a crafts and hobbies store. They have come to you to obtain information about the basic elements of a partnership agreement. Partnership agreements usually specify an income and loss-sharing ratio. The agreements also may provide for such additional income and loss-sharing features as salaries, bonuses, and interest allowances on invested capital.
Required
a. Discuss why a partnership agreement may need features in addition to the income and loss sharing ratio.
b. Discuss the arguments in favor of recording salary and bonus allowances to partners as expenses included in computing net income.
Judgment
c. What are the arguments against recording salary and bonus allowances to partners as partnership expenses?
d. Some partnership agreements contain a provision for interest on invested capital in distributing income to the individual partners. List the additional provisions that should be included in the partnership agreement so the interest amounts can be computed.