Jana Bell originally contributed $20,000 and Matt Fischer originally contributed $10,000 in a public relations firm that has operated for 10 years. Bell and Fischer have shared profits and losses in a 2:1 ratio of their capital balances in the business. Bell manages the office, supervises employees, and does the accounting. Fischer, the moderator of a television talk show, is responsible for marketing. His high- profile status generates important revenue for the business. During the year ended December 31, 2014, the partnership earned net income of $220,000, shared in the 2:1 ratio. On December 31, 2014, Bells capital balance was $150,000, and Fischers capital balance was $100,000.
Requirements
Respond to each of the following situations.
1. During January 2015, Bell learned that revenues of $60,000 were omitted from the reported 2014 income. She brings this omission to Fischers attention, pointing out that Bells share of this added income is two-thirds, or $40,000, and Fischers share is one-third, or $20,000. Fischer believes they should share this added income on the basis of their capital balances-60%, or $36,000, to Bell and 40%, or $24,000, to himself. Which partner is correct? Why?
2. Assume that the 2014 omission of $60,000 was for an operating expense. On what basis would the partners share this amount?