Evaluating Methods of Dividing Partnership Earnings Jo Garrity, Maureen ORiley, and

QUESTION:

Evaluating Methods of Dividing Partnership Earnings

Jo Garrity, Maureen O’Riley, and David White decided to form a partnership called OnTime Copy Shop. The partners will invest the following assets in the business:

                                       Garrity                    O’Riley                    White

          Cash                             0                    $22,000                  $40,000

          Supplies                        0                        5,000                      2,000

          Equipment                     0                        7,500                      4,000

          Building              $50,000                                0                             0

          Land                     15,000                                0                             0

They are considering the following plans for the division of net income or net loss:

1. Equally

2. Garrity, 20%; O’Riley, 40%; White, 40%

3. In the same ratio as the beginning balances of their capital accounts

Instructions Assume that the business had a net income of $17,500 in its first year of operations. Calculate the division of net income under each of the three plans.

Analyze Identify which method O’Riley would prefer and why.