Relevant Work Experience Of The Partners †Myassignmenthelp.Com

Question: Discuss About The Relevant Work Experience Of The Partners? Answer: Introduction: This assignment describes that how business profit can be divided between the partners in absence of any partnership agreement depending upon the factors like the capital investment made by the partners, the qualification and relevant work experience of the partners. In this assignment several scenarios of profit distribution has been considered on the basis of a case study in which two partners O'Malley O'Reilley have started a information system consulting business without any partnership management and has decided to take the share of the profit as per their own terms and conditions that will be decided by their own. The assignment also analyzes and identifies the profit distribution scenario that will be most appropriate for the partners of the business depending upon the factors under consideration (Kimmel et al.,2010). Profit distribution between the partners with respect to the following Scenarios Partnership Agreement :The financial Scenario of the given case PARTNERS Qualification Relevant job Experience(in years) Initial Investments,$ Additional investment,$ Total investment,$ Withdrawal amount in cash,$ O'Malley Masters Degree in information system 5 400000 40000 440000 50000 O'Reilley Graduate degree in information system 3 360000 360000 50000 Total Expected Profit 120000 Case Scenario-(a) Scenario-1 No suggestion of profit distribution has been given by the partners PARTNERS Assumptions: Total profit to be distributed Distributed profit share to the partners($) O'Malley profit is to be divided equally between the partners 120000 60000 O'Reilley 60000 As per the case scenario-(a) as the partner have not made any suggestion for the distribution of profit so it has been assumed that the profit will be distributed equally between the partners and thus each of the partners are earning an income of $60000 as presented in Table-2. Case Scenario-(b) Scenario-2 Distribution of profit in terms of original capital balances PARTNERS Total profit to be distributed,$ Total capital contributed,$ Percentage share of original capital contribution Distributed profit share to the partners($) O'Malley 120000 440000 55% 66000 O'Reilley 360000 45% 54000 Total 800000 Under the case scenario-(b) the partners have decided to share the profit in proportion of the capital contribution of the partners out of the total capital corpus of the business. The total capital corpus of the business is $ 800000 and the partner O'Malley have contributed 55% of the total corpus as the person having a strong financial base due to his personal inheritance and rest 45% of the corpus is contributed by the other partner O'Reilley. Thus as the capital contribution of O'Malley is higher than OReilley, So O'Malley is receiving a higher share of the profit earned by the business Case Scenario-(c) Scenario-3 Distribution of profit on the basis of closing Capital Retained Profit PARTNERS Total profit to be distributed Salary received Drawings Investments Closing capital calculation Percentage share in Closing Capital Distribution of net profit share to the partners($) Total income earned by the partner($) O'Malley 120000 40000 50000 440000 360000 3000 10000 53000 O'Reilley 60000 50000 360000 3000 10000 73000 Total Closing Capital=Investments +Net profit [Gross profit-salary paid]-Drawings (Nobes,2011) The case scenario-(c) describes that the partners have decided to value the education level and relevant work experience of the partner O'Reilley and thus decided that a salary of $60000 to be given to O'Reilley, and a salary of $40000 to O'Malley as per the relevant work experience of the partners (Steele, 2009). Apart from that both the partners will receive a 5% interest income over the closing capital (for the two months period of May June,2016 as capital withdrawal is done on 2016)and the 50% share of the residual profit [gross profit-salary paid to the partners]. Total income of partner=salary received+ percentage income from closing capital+50% share of the residual profit Please note that first of all the amount of distributable closing capital or say the residual closing capital has been calculated after deducting the drawings made by both the partners from the sum of the investments made by both the partners and net profit (Here net profit has been calculated after deducting the salary of both the partners from the gross distributable profit).Then the interest income on the closing capital has been calculated at the rate of 5% per annum for a period of 2 months from 1,st May,2016-30th June,2016 and this amount of $3000 has been added in the income of each partner as Percentage share in closing Capital($3000).After that the net profit or the accounting profit has been distributed equally between the partners. So both the calculation and distribution of the closing capital in scenario C is based on both the partners O'Malley O'Reilley. Thus the calculation in scenario-C has been done by considering and applying each of the aspects mentioned in this s cenario. A discussion on the appropriateness of the partnership agreements with respect to the above Scenarios From the above discussion of the three scenarios of profit distribution it can be said that the appropriateness of a informal agreement of sharing the profit between the partners of the business depends upon the factor which the business want to value. Generally a business can make future progress if it values the talent of the partners and employees of the business .In the given case scenario the partner O'Reilley is more experienced and posses a higher degree with respect to the relevant field of Information system consulting business. Therefore the partners should consider the scenario-3 as the most appropriate method of profit sharing that maximizes the income of O'Reilley and thus value his experience and education. If O'Reilley receives a higher pay in the business then he will apply his expertise in a better way to enhance the overall profit turnover of the business. Recommendation with respect to the partnership Agreements at the event of loss If the business incurs loss then none of the partners will be able to get any kind of payment for the investments they have made to the business both in terms of capital and talent. In such a situation both the partners should go for withdrawn of a certain amount of money from the existing capital reserves of the company in anticipation of profit. If loss made by the company then partners will at least be happy with the withdrawn. However if profit is earned then it will be distributed among the partners as per their own terms conditions decided by them depending upon the exiting financial condition of the business Conclusion: The assignment describes that in absence of any partnership agreement a strong understanding is required between the partners for smooth distribution of profit between the partners (Gitman et al.,2015). From the discussion of the above case scenarios it can be seen that if importance has to be given to the work experience and education of the partners then the scenario-3 should be the best option of profit maximization as scenario-3 maximizes the income of the partner O'Reilley who have got a higher level of education and longer period of relevant work experience with respect to the other partner named O'Malley. On the other hand if the factor capital contribution has to be given importance then scenario-2 will be the best option as it maximizes the profit sharing of the partner O'Malley who have contributed a greater portion of the total capital invested in the business. Reference: Gitman, L.J., Juchau, R. and Flanagan, J., 2015.Principles of managerial finance. Pearson Higher Education AU. Kimmel, P.D., Weygandt, J.J. and Kieso, D.E., 2010. Financial accounting: tools for business decision making. John Wiley Sons. Nobes, C., 2011. IFRS practices and the persistence of accounting system classification.Abacus,47(3), pp.267-283. Steele, M.T., 2009. Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies.American Business Law Journal,46(2), pp.221-242.