Susan claims the $60,000 should be divided equally among the partners. Who is correct? Explain.
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Lauren, Matthew, and Susan form a partnership, with Lauren contributing $100,000, Matthew contributing $50,000, and Susan contributing her time and skill. Nothing is said regarding the division of profits. The firm later dissolves. No distributions to partners have been made since the partnership was formed. The partnership sells its assets for a loss of $90,000. After payment of all firm debts, $60,000 is left. Lauren claims that she is entitled to the entire $60,000. Matthew contends that the distribution should be $40,000 to Lauren and $20,000 to Matthew. Susan claims the $60,000 should be divided equally among the partners. Who is correct? Explain. |
Explanation
Based on both revised uniform partnership act and uniform partnership act in absence of a clause relating to allocation of profits in the agreement of partnership, the losses should be divided equally. In this case, the partnership agreement does not mention anything about how the losses should be distributed.
Start with allocating the losses first. For the same purpose, the loss of $90,000 is adjusted in a way that each partner will bear the burden of $30,000.
Accordingly, capital of Individual L stands at $70,000, and capital of Individual M stands at $20,000. Individual S has to pay off $30,000 from his share because he did not contribute at the time when the partnership came into effect. For this reason, Individual S had no amount in their account.
Once Individual S brings $30,000, the total sum available for distribution among Individuals L and M becomes $90,000. This sum of $90,000 includes the profit of $60,000 earned by the firm. Finally, $90,000 can be distributed among Individuals L and M as their respective share of profit, which is $70,000 and $20,000, respectively.
Verified Answer
Neither of the partners' claims are right. First, the loss shall be distributed equally among all the partners after which the allocation of profits will become inevitably smoother.
This is because the partnership agreement in this case does not mention any specific clause about allocation of profits and distribution of losses.
