Project Assignment
Overview
In the role of the accountant, decisions are not always made based on what the numbers show. There are often ethical considerations in addition to financial considerations. While the rules and guidelines of the Generally Accepted Accounting Principles (GAAP) are set firmly in place, it is up to the accountant to interpret them.
For Final Project Two, you will create a memo to help three partners in a business fairly decide how to split the profits from the first year of their business. While one of the partners has infused the most cash into the business, the others have brought value in unique ways-including attracting customers and overseeing the day-to-day activities.
The final product will be submitted in Module Seven.
In this assignment, you will demonstrate your mastery of the following course competencies:
• Analyze economic activity of complex or unique business situations.
• Explore the impact of emerging domestic, global, and technological factors that could affect financial reporting.
Prompt
Compose a memo addressing the allocation of profits to three partners of a new business: Alan, Bob, and Carol. It is your responsibility to address the potential ways in which the first-year profits can be divided among these partners, including whether the partners should be taking a salary, how the partners' capital accounts may be affected by various decisions, and the most ethical way that the profits could be divided.
Your memo should answer the following prompt: A new business client comes to your office. There are three owners of the business. The three individuals, Alan, Bob, and Carol, are thinking about forming a partnership. Alan is only investing $1 million in cash. He will not have anything to do with the daily activities of the business. Bob has had some experience in the business and will be responsible for the day-to-day operations of the business. Carol has a great deal of experience and many contacts within the business. She will be responsible for attracting new clients. Neither Bob nor Carol are investing cash into the partnership. During the first year of operation, the partnership generated a profit of $150,000. None of the partners received distributions during the year.
Specifically, the following critical elements must be addressed:
I. Allocation of Profits
A. Explain how allocating the profits evenly between the partners would work. Consider the fairness to each of the partners in your response.
B. What would be the value of each partner's capital account at the end of the year, given that the profits were allocated evenly among the three? Support your answer with quantitative data and an explanation of how you came to this conclusion.
C. Explain an alternative method of allocating the profits if 80% of the profits was given to the cash investor and the remaining amount was split evenly between the other two partners.
D. What would be the value of each partner's capital account at the end of the year, given this alternative allocation method? Support your answer with quantitative data and an explanation of how you came to this conclusion.
II. Payment of Salary
A. Should the two partners who are working in the business receive a salary? Why or why not? Be sure to support your decision with research and quantitative data.
B. If the two non-investors did receive a salary, how would their capital account be affected? How would this impact a potential future liquidation or buyout? Be sure to thoroughly explain and support your answer.
C. Should the cash investor receive a higher share of the profits or other sharing options? Why or why not? Support your opinions with research and quantitative data.
D. If the cash investor did receive a salary, how would his capital account be affected? How would this impact a potential future liquidation or buyout? Be sure to thoroughly explain and support your answer.
E. How do the payment of salary and the allocation of profit affect entries and the financial bottom line? Be sure to support your explanation with concrete examples.
F. How could the payment of salary and allocation of profit be a more effective method of splitting the company's profits for the three partners? Explain a scenario in which the three partners would all be compensated fairly, and support your answer with logical reasoning.
G. What would be the value of each partner's capital account at the end of the year, given your proposed fair allocation method? Support your answer with quantitative data and an explanation of how you came to this conclusion.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.