Chapter 12

Beginning Capital Balances

  • Initial capital balances of partners:

    • Zane:

    • Amount: $30,000

    • Stake in the company: 75%

    • Perez:

    • Amount: $10,000

    • Stake in the company: 25%

  • Total company valuation: $40,000

Ratios and Income Allocation

  • Importance of Ratios:

    • When calculating ownership percentages, combined ratios must equal 100%.

    • If ratios do not add to 100%, calculations are incorrect.

    • Example: Zane (75%) + Perez (25%) = 100%.

  • Income Allocation:

    • Total income stated: $60,000.

    • Zane’s allocation: 75% of $60,000 = $45,000.

    • Perez’s allocation: 25% of $60,000 = $15,000.

  • Check on Income Distribution:

    • Allocated income must match net income.

    • Example check: If net income is $60,000, total distributed can't exceed $60,000.

Salary and Interest Allowances

  • Salaries:

    • Zane's salary: $36,000.

    • Perez's salary: $24,000.

  • Interest Allowance:

    • Each partner receives a guaranteed annual interest at:

    • Rate: 10% on the beginning capital balance.

    • Zane’s interest: 10% of $30,000 = $3,000.

    • Perez’s interest: 10% of $10,000 = $1,000.

Total Allocations

  • Calculation of Total Distributions:

    • Zane's total before remainder allocation: $36,000 + $3,000 = $39,000.

    • Perez's total before remainder allocation: $24,000 + $1,000 = $25,000.

    • Combined total: $39,000 + $25,000 = $64,000.

  • Shortage Identification:

    • If total amount distributed exceeds net income ($60,000), there is a shortage: $64,000 - $60,000 = $4,000 shortage.

  • Final Remainder Allocation:

    • If remainder is to be split equally:

    • Remaining: $60,000 allocated - $64,000 distributed = -$4,000 (shortage).

    • Amount clawed back per partner to resolve the shortage:

    • Zane: $7,000.

    • Perez: $7,000.

  • Adjusted Final Distributions:

    • Zane's final amount: $39,000 - $7,000 = $32,000.

    • Perez's final amount: $25,000 - $7,000 = $18,000.

Partner Withdrawals

  • Withdrawal Calculations:

    • Zane's withdrawal: $20,000 from initial balance.

    • Starting balance: $30,000 + allocations: $32,000.

    • Ending balance after withdrawal: $32,000 - $20,000 = $12,000.

    • Perez's withdrawal: $12,000 from initial balance.

    • Starting balance: $10,000 + allocations: $18,000.

    • Ending balance after withdrawal: $18,000 - $12,000 = $6,000.

Admission of New Partners

  • Buying Another's Stake:

    • Acquisition of existing partner's stake:

    • Example: Rashid pays Perez for half his stake in the partnership.

    • Important: Purchase price does not equate to immediate book value adjustment.

    • Shark Tank example: Buying 5% of a company at a specified amount does not change the percentage value on the books.

    • Actual value of 5% is based on the total book value, not based solely on acquisition payment.

  • Donation of Capital:

    • Example of Rashid donating $22,000 to the company:

    • Results in increasing company value from $78,000 to $100,000.

    • Rashid's stake correlated with new company valuation, not existing stake purchase.

Partnership Withdrawals and Deaths

  • Partner Withdrawal:

    • Scenario: Perez has a stake worth $38,000 and chooses to withdraw.

    • If company does not have sufficient funds to pay him, partners must cover the difference.

    • Partners would need to contribute to cover Perez's withdrawal.

  • Partnership Death:

    • If a partner passes away, their partnership interest ceases, leading to a dissolution of that partnership agreement.