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 partnership agreement. Pete will be able to contribute $1,000 as well as his guitar which has a fair market value of $500. Grumpy Toad will be able to contribute his bass with a fair value of $800. 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?
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 partnership agreement. Pete will be able to contribute $1,000 as well as his guitar which has a fair market value of $500. Grumpy Toad will be able to contribute his bass with a fair value of $800. 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 partnership agreement. Pete will be able to contribute $1,000 as well as his guitar which has a fair market value of $500. Grumpy Toad will be able to contribute his bass with a fair value of $800.
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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