Assignment
Evaluating whether or not to continue to share profits. Raymond is a senior partner in a manufacturing firm and is approaching retirement age. In discussing succession planning with the company partners, two alternatives have been presented to Raymond. The first alternative would call for Raymond to receive a distribution of his share of current-year 2015 profits on March 31, 2016, along with a lump sum payment of $1,500,000 for his capital balance. The 2015 profit-sharing agreement is as follows:
Raymond Other Partners
Salaries $125,000 $300,000
Bonus on income after bonus 10% 0%
Percentage of remaining profits 40% 60%
The second alternative would consist of the following components:
1. Adistribution of his share of current-year profits on March 31, 2016.
2. A distribution of his share of 2016-2017 profits on March 31 of each subsequent year. The profit-sharing agreement for 2016 and 2017 would be modified from the 2015 agreement as follows:
Raymond Other Partners
Salaries $80,000 $350,000
Bonus on income after bonus 0% 10%
Percentage of remaining profits 20% 80%
3. On March 31, 2018, Raymond would receive a lump sum payment of $1,700,000 for his interest in capital.
In order for Raymond to make an informed decision he has come to you seeking your advice on which alternative to accept. Raymond believes that they can invest all cash proceeds at a rate of 8% compounded annually. It is anticipated that the partnership will have income for years 2015-2017 of $550,000, $605,000, and $682,000, respectively.