A partnership without a partnership agreement
O’Malley and O’Reilly formed a partnership on 1 July 2015 to run an information systems consultancy business by investing $ XXXXXXXXXXand $ XXXXXXXXXXrespectively. Both partners work similar hours in the business. O’Reilly has a Masters degree in information systems and 5 years’ experience in the workforce; O’Malley has an undergraduate degree and has worked for 3 years; she has invested money inherited from her parents. On 1 January 2016 O’Malley invested an additional $40 000 cash as a capital contribution. On 1 May 2016 O’Malley and O’Reilly withdrew $50 000 each in cash in expectation of profits for the cu
ent year ended 30 June 2016. They had not drawn up a partnership agreement and so are not sure how the profits of $ XXXXXXXXXXshould be distributed to each partner. You have been asked to decide the most appropriate way to divide the profit, and a number of alternative scenarios are provided for you to consider:
a) no suggestions have been made by the partners
) the partners suggest distributing the profits in the ratio of the original capital balances
c) the partners suggest that O’Malley receives a salary of $40 000 and O’Reilly receives a salary of $60 000 to reflect his greater qualifications and experience, with interest of 5% on ending capital balances, and the remainder distributed evenly between the partners.
Required
A. Calculate the amount of profit distribution to each partner under each scenario. Which scenario is most favourable to O’Malley and to O’Reilly?
B. Given the capital commitments and expertise of each partner, which scenario is the most appropriate for the partnership agreement?
C. What recommendations would you make for any proposed partnership agreement in the event that the partnership incurs a loss for the year?
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Partnership concerns
Craig Fraser and Michelle Mason set up a partnership to run a small retail business. Craig contributed $60 000 to begin the business and Michelle’s contribution was $ XXXXXXXXXXCraig is confident with numbers and accounting whereas Michelle prefers to deal with people and to ignore anything requiring numbers. Michelle has put her trust in Craig to set up the financial side of the business. Craig has decided that all profits should be distributed according to the initial capital contribution by each of the partners.
During the second year of operation Craig bought a new house and to finance the deposit he withdrew $20 000 from his capital investment in the partnership. Michelle accepted that this was reasonable and did not even think about the implications for profit distribution. The following year Craig withdrew another $20 000 from his capital investment in the partnership to reduce his house mortgage. Michelle accepted that as Craig had put the money into the partnership it was only fair that he could take it out again.
Craig and Michelle both worked actively in the business, and generally worked well together as business partners. They both were entitled to a salary of $30 000 on the assumption that they would contribute equally to the management of the business.
Required
A. Who are the stakeholders in this situation?
B. Does Craig appear to be doing anything wrong? Explain your response.
C. Are there any ethical issues involved here? If so, identify them.