Sixty-year-old Mary Filmore retired from her computer consulting business in Boston and moved to Florida. There she met 27-year-old Emily Wright, who had just graduated from Eldon Community College with an associate degree in computer science. Mary and Emily formed a partnership called F&W Computer Consultants. Mary contributed $35,000 for startup costs and devoted one-half time to the business. Emily devoted full time to the business. The monthly drawings were $2,000 for Mary and $4,000 for Emily.
At the end of the first year of operations, the two partners disagreed on the division of net income. Mary reasoned that the division should be equal. Although she devoted only one-half time to the business, she contributed all of the startup funds. Emily reasoned that the income-sharing ratio should be 2:1 in her favor because she devoted full time to the business and her monthly drawings were twice those of Mary.
a. Can you identify any flaws in the partners’ reasoning regarding the income-sharing ratio?
b. How could an income-sharing agreement resolve this dispute?