Evaluating a Partnership Profit-Sharing Proposal

Accounting for Partnerships

Skill: Evaluate

Stimulus

Question

(a) Calculate each partner's total share of profit under Proposal A and Proposal B.

(b) Evaluate both proposals and recommend the fairest arrangement. Justify your answer by linking each type of reward (salary, interest on capital, balance) to each partner's actual contribution.

Thinking steps

1. Identify the net profit RM90,000 and the current arrangement: equal sharing means each partner receives RM45,000 (Proposal A).
2. Compute Proposal B in order: Ganesan's salary RM24,000 first, then interest on capital (Halimah RM6,000, Ganesan RM2,000), then the balance RM58,000 split equally RM29,000 each.
3. Compare totals: Halimah RM45,000 → RM35,000 (down RM10,000); Ganesan RM45,000 → RM55,000 (up RM10,000).
4. Link each reward to a contribution: salary rewards Ganesan's active effort; interest on capital rewards Halimah's larger capital (RM120,000 versus RM40,000).
5. Weigh each weakness: Proposal A ignores Ganesan's effort; Proposal B rewards effort but still splits the balance equally although Halimah's capital is 3 times Ganesan's.
6. Reach a justified decision: choose the proposal (or an amendment) that ties each reward to actual contribution, and explain why that choice resolves the conflict between the two partners.

Model answer

(a) Proposal A (equal sharing): each partner receives RM45,000.

Proposal B: Ganesan's salary RM24,000; interest on capital Halimah RM6,000 and Ganesan RM2,000; balance RM58,000 shared equally RM29,000 each. Totals: Halimah RM35,000, Ganesan RM55,000. Compared with Proposal A, Halimah falls by RM10,000 and Ganesan rises by RM10,000.

(b) I recommend Proposal B (with one amendment) because it is fairer in principle: partnership appropriation separates two different kinds of contribution. The salary rewards Ganesan's EFFORT and time as the full-time working partner, while interest on capital rewards the CAPITAL invested. Under Proposal A, Halimah, a purely passive partner, receives the same amount as Ganesan even though she contributes no daily effort, so Proposal A penalises Ganesan.

However, Halimah's objection has some basis: her capital (RM120,000) is three times Ganesan's (RM40,000), yet the balance RM58,000 is still split equally, so her larger capital is not fully recognised in the balance. My proposed amendment is to share the balance in the capital ratio 3:1 (Halimah RM43,500, Ganesan RM14,500), so that effort is rewarded through salary and capital is rewarded through both interest and the balance ratio. This decision resolves the conflict because every reward is tied to each partner's actual contribution. (Any other decision is accepted if the justification is reasonable and supported by the figures.)