A is corrent. Farr’s share of partnership profit consists of the guaranteed payment of interest plus (minus) any share of residual profit (loss). The bonus to Donn, as well as the interest payments to all partners, must be calculated and subtracted from total partnership income before residual profit (loss) is allocated. The distribution of interest and bonus is performed even if it results in a net loss. Any remaining profit (loss) is then allocated to the partners based on their profit or loss sharing percentages (equally, in this case).| | Donn | Eddy | Farr | | Bonus to Donn (10% x $100,000) | $10,000 | | | | Interest allowance: | | | | | Donn ($80,000 x 6%) | 4,800 | 3,000 | | | Eddy ($50,000 x 6%) | | | | | Farr ($30,000 x 6%) | | | 1,800 | | Remaining profit (1/3 each) | 26,800 | 26,800 | 26,800 | | Share of profits | $41,600 | $29,000 | $28,600 |
Therefore, Farr receives $28,600 of the partnership profits.B is incorrect. Farr’s share of partnership profit consists of the guaranteed payment of interest plus (minus) any share of residual profit (loss). The bonus to Donn, as well as the interest payments to all partners, must be calculated and subtracted from total partnership income before residual profit (loss) is allocated. The distribution of interest and bonus is performed even if it results in a net loss. Any remaining profit (loss) is then allocated to the partners based on their profit or loss sharing percentages (equally, in this case).
| | Donn | Eddy | Farr | | Bonus to Donn (10% x $100,000) | $10,000 | | | | Interest allowance: | | | | | Donn ($80,000 x 6%) | 4,800 | 3,000 | | | Eddy ($50,000 x 6%) | | | | | Farr ($30,000 x 6%) | | | 1,800 | | Remaining profit (1/3 each) | 26,800 | 26,800 | 26,800 | | Share of profits | $41,600 | $29,000 | $28,600 |
Therefore, Farr receives $28,600 of the partnership profits.C is incorrect. Farr’s share of partnership profit consists of the guaranteed payment of interest plus (minus) any share of residual profit (loss). The bonus to Donn, as well as the interest payments to all partners, must be calculated and subtracted from total partnership income before residual profit (loss) is allocated. The distribution of interest and bonus is performed even if it results in a net loss. Any remaining profit (loss) is then allocated to the partners based on their profit or loss sharing percentages (equally, in this case).
| | Donn | Eddy | Farr | | Bonus to Donn (10% x $100,000) | $10,000 | | | | Interest allowance: | | | | | Donn ($80,000 x 6%) | 4,800 | 3,000 | | | Eddy ($50,000 x 6%) | | | | | Farr ($30,000 x 6%) | | | 1,800 | | Remaining profit (1/3 each) | 26,800 | 26,800 | 26,800 | | Share of profits | $41,600 | $29,000 | $28,600 |
Therefore, Farr receives $28,600 of the partnership profits.D is incorrect. Farr’s share of partnership profit consists of the guaranteed payment of interest plus (minus) any share of residual profit (loss). The bonus to Donn, as well as the interest payments to all partners, must be calculated and subtracted from total partnership income before residual profit (loss) is allocated. The distribution of interest and bonus is performed even if it results in a net loss. Any remaining profit (loss) is then allocated to the partners based on their profit or loss sharing percentages (equally, in this case).
| | Donn | Eddy | Farr | | Bonus to Donn (10% x $100,000) | $10,000 | | | | Interest allowance: | | | | | Donn ($80,000 x 6%) | 4,800 | 3,000 | | | Eddy ($50,000 x 6%) | | | | | Farr ($30,000 x 6%) | | | 1,800 | | Remaining profit (1/3 each) | 26,800 | 26,800 | 26,800 | | Share of profits | $41,600 | $29,000 | $28,600 |
Therefore, Farr receives $28,600 of the partnership profits. |
