The Ace and Deuce partnership has been created to operate a law firm. The partners are attempting to devise a fair system to allocate profits and losses
The Ace and Deuce partnership has been created to operate a law firm. The partners are attempting to devise a fair system to allocate profits and losses. Ace plans to work more billable hours each year than Deuce. However, Deuce has more experience and can charge a higher hourly rate. Ace expects to invest more money in the business than Deuce.Required
Build a spreadsheet that can be used to allocate profits and losses to these two partners each year. The spreadsheet should be constructed so that the following variables can be entered:
- Net income for the year.
- Number of billable hours for each partner.
- Hourly rate for each partner.
- Capital investment by each partner.
- Interest rate on capital investment.
- Profit and loss ratio.
Use this spreadsheet to determine the allocation if partnership net income for the current year is $200,000, the number of billable hours is 2,000 for Ace and 1,500 for Deuce, the hourly rate for Ace is $20 and for Deuce is $30, and investment by Ace is $80,000 and by Deuce is $50,000. Interest on capital will be accrued each year at 10 percent of the beginning balance. Any remaining income amount will be split 50-50.
Use the spreadsheet a second time but make these changes: Deuce reports 1,700 billable hours, Ace invests $100,000, and interest will be recognized at a 12 percent annual rate. How do these three changes impact the allocation of the $200,000?
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