FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Pete the Cat and his friend Grumpy Toad are starting a band. As they think it will be quite successful, it would be smart to officially set up a
Pete talks to his brother Bob about the agreement and Bob puts forward two suggestions.
Option 1
- Pete gets a salary of $10,000 and Grumpy gets a salary of $12,000
- Pete earns 20% interest and Grumpy earns 15%
- Remaining income is split 50 / 50
Option 2
- Both partners get a salary of $15,000
- Both partners earn 15% interest
- Remaining income is split 75 / 25 (Pete / Grumpy)
Pete thinks that in year 1 the band will make $5,000 but in future years this will be $35,000 and then $60,000.
Pete has come to you - his mom / dad for advice. Which option is better for Pete? Which option is better for the band? Pete also wants to know a little bit about partnerships - what are some advantages and disadvantages he might want to think about?
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- Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his own business and convinces Rob O’Donnell, a local merchant, to contribute the capital to form a partnership. On January 1, 2019, O’Donnell invests a building worth $74,000 and equipment valued at $44,000 as well as $32,000 in cash. Although Reese makes no tangible contribution to the partnership, he will operate the business and be an equal partner in the beginning capital balances. To entice O’Donnell to join this partnership, Reese draws up the following profit and loss agreement: O’Donnell will be credited annually with interest equal to 10 percent of the beginning capital balance for the year.O’Donnell will also have added to his capital account 10 percent of partnership income each year (without regard for the preceding interest figure) or $6,000, whichever is larger. All remaining income is credited to Reese.Neither partner is allowed to withdraw funds from the partnership during 2019.…arrow_forward5.arrow_forwardVelma and Keota (V&K) is a partnership that owns a small company. It is considering two alternative investment opportunities. The first investment opportunity will have a five-year useful life, will cost $15,169.64, and will generate expected cash inflows of $3,900 per year. The second investment is expected to have a useful life of four years, will cost $10,073.45, and will generate expected cash inflows of $3,600 per year. Assume that V&K has the funds available to accept only one of the opportunities. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Calculate the internal rate of return of each investment opportunity. (Do not round intermediate calculations.) b. Based on the internal rates of return, which opportunity should V&K select? Internal Rate of Return % a. First investment % Second investment b. V&K should select the second investmentarrow_forward
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