Henry Wilson to contribute all of his time to the business and to receive 20 percent of the profits.

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Henry Wilson to contribute all of his time to the business and to receive 20 percent of the profits.

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The articles of partnership of the firm of Wilson and Company provide the following:

William Smith to contribute $50,000; to receive interest thereon at 13 percent per annum and to devote such time as he may be able to give; to receive 30 percent of the profits.
John Jones to contribute $50,000; to receive interest on same at 13 percent per annum; to give all of his time to the business and to receive 30 percent of the profits.
Henry Wilson to contribute all of his time to the business and to receive 20 percent of the profits.
James Brown to contribute all of his time to the business and to receive 20 percent of the profits.

There is no provision for sharing losses. After six years of operation, the firm is dissolved and wound up. No distributions to partners have been made since the partnership was formed. The partnership assets are sold for $400,000 with a loss of $198,000. Liabilities to creditors total $420,000. What are the rights and liabilities of the respective parties?

Explanation & AnswerSolution by a verified expert

Explanation

At the time of winding up of the partnership, the liabilities of the firm are paid first, then remaining amount is shared between partners as profit. In this case, firm is having a loss of $198,000 and the assets of the firm realized at $400,000 and liabilities of the firm amounted to $420,000.
 
The total capital contribution to the firm is $100,000, equally done by Partner WS and Partner JJ. They are entitled to receive interest on capital at the rate of 13%, which amounts to $39,000 and bear losses at the rate of 30%, which amounts to $59,400. So, Partner WS and Partner JJ are entitled to receive an amount of $29,600 ($50,000+$39,000-$59,400) each.
 
Partner HW and Partner JB will have to contribute their share of loss, which amounts to $39,600 at the rate of 20% each. The contribution by both the partners amounts to $79,200, which is added to the value of assets realized. The liabilities of firm are paid by using this amount and the remaining amount of $59,200 will be provided to Partner WS and Partner JJ in equal share.

Verified Answer

In this case, the rights and obligation of four partners under RUPA and UPA can be as follows:

Partner WS and Partner JJ are entitled to receive an interest on capital of $39,000 as mentioned in agreement. They will share the losses of $198,000 in the ratio of their profit sharing, which amounts to $59,400.
Partner HW and Partner JB will contribute to the firm their share of losses, which amounts to $39,600 as they have not contributed any capital to the firm.

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