Partnership Ag r eement
Nitty and 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. These agreements usually specify an income and loss–sharing ratio. Th e y also may
Chapter 15 Partnerships: Formation, Operation, and Changes in Membership 789
provide for additional income and loss–sharing features such as salaries, bonuses, interest allow- ances 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.
c. What are the arguments against recording salary and bonus allowances to partners as partner- ship expenses?
d. Some partnership agreements provide for interest on invested capital in distributing income to the individual partners. List the additional provisions that should be included so the interest amounts can be computed.
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