The Red and Blue partnership has been created to operate a law firm. The partners have been attempting to devise a fair system to allocate profits and losses. Red plans to work more billable hours each year than Blue. However, Blue has more experience and can charge a higher hourly rate. Red expects to invest more money in the business than Blue.
Build a spreadsheet that can be used to allocate profits and losses to these two partners each year. The spreadsheet should be constructed so that the following variables can be enterered:
- Net income for the year
- Number of billable hours for each partner
- hourly rate for each partner
- Capital investment by each partner
- Interest rate on capital investment
- Profit and loss ratio
1.Use spreadsheet to determine allocation if partnership net income for the current yearis $200,000, the numberof billable hoursis 2,000 for Red and 1,500 for Blue, the hourly rate for Red is $20 and for Blue is $30, Investment by Red is $80,000 and by blue is $50,000. 2.Interest on capital will be accrued each year at 10 percent of the beginning balance. Any remaining income amount will be split 50-50.
3.Use spread sheet again to make changes: Blue reports 1,700 billable hours, Red invests $100,000 and interest will be recognized at a 12 percent annual rate. How do these three changes impact the allocation of the $200,000?