Question

yoda and jabba recently joined together to form "Star Wars Master Trianers Partnership," which will provide extensive personal training to potential Jedis. Yoda invested $120,000 cash, while Jabba invested $46,000 of equipment and $22,000 cash. then partners are trying to decide on a fair way of splitting up the anticipated partnership net income. They have asked you to develop a worksheet to allow them to see how much net income will be allocated to each partner as assumptions change regarding partnership net income, interest allowances, salary allowances, and splits of any "remainders."

A. List at least two factors that Yoda and Jabba should consider when deciding how much of the partnership net income should be allocated to each of the partners.

B. What is the major drawback of the partnership form of organization?

C. What is meant by the term "mutual agency?" Why is this a major concern to a partner in a partnership?

D. Identify at least three items that should be included in a partnership agreement. Do not include in your answer interest allowance, salary allowance, or allocation of remainder.

Answer 1

Ans.: Therein question, Yoda and Jabba had not defined any agreement to define profit sharing ratio. Herein total contribution by two partners is total assets of the firm "Star Wars Master Trainers Partnership". Which comes to Rs. $188,000.

A. There are following two factors which need to be considered:

i. There is no agreement defined.

ii. If there is no agreement defined, so value of contribution by Yoda & Jabba will form basis for determination of Profit/Loss sharing ratio.

So Yoda's share will be: $120000/$188000=64% &

Jabba's share will be: $68,000= 36%.

B. The followings are major drawback of the partnership form:

i. Unlimited Liability: The liabilities of partners in partnership form is unlimited. In case of default of firm, liability of partners is upto their personal assets.

ii. Difficult to transfer shares: It's very difficult to transfer of partner's share. Because it is not easily transferable like share of company.

iii. limited capital: In case of partnership firm. capital strength of partners is equal to strength of partners. Maximum they contribute will be capacity of firm.

iv. problem of disputes: In case of disputes, there is no defined dispute redressal system.

v. lack of prompt decision: Decision taking process in case of partnership is limited subject to partners's knowledge, skills & educations.

C. What is mutual agency

Under partnership firm, the rights of all partners is to represent the company's normal business operations and authority to bind it mutually contracts and agreements among all partners. This is a principal of "Mutual Agency" . Technically it means the authority given to a person doing business on behalf the partners or business owners.

D. Items to be included in Partnership Agreement

Although there are major items which need to be included in Partnership agreements like allocation of profits & losses, decision making process, what to be included in case of deaths etc. But following three items are major and can be said to be lifeline of partnership agreements:

(i). Percentage of ownership: Defining the ownership ratio of partners is basic requirement in preparation of partnership agreement.

(ii). Making decisions: In partnership agreement, defining decision making rights & authorities process is key important matter. So well defining this in agreement is  primary matter.

(iii) Resolving disputes: Dispute redressal process and system is needed to deployed in partnership. This will ensure long term sustainability of partnership firm.