Decision Case P 2 Jana Bell invested $20,000 and Matt Fischer invested $10,000 in a public relations firm that has operated for 10 years. Bell and Fischer have shared profits and losses in the 2:1 ratio of their investments in the business. Bell manages the office, supervises employees, and does the accounting. Fischer, the moderator of a television talk show, is responsible for marketing. His high profile status generates important revenue for the business. During the year ended December 2011, the partnership earned net income of $220,000, shared in the 2:1 ratio. On December 31, 2011, Bell’s capital balance was $150,000, and Fischer’s capital balance was $100,000. (Bell drew more cash out of the business than Fischer.)
Respond to each of the following situations.
1. During January 2012, Bell learned that revenues of $60,000 were omitted from the reported 2011 income. She brings this omission to Fischer’s attention, pointing out that Bell’s share of this added income is two thirds, or $40,000, and Fischer’s share is onethird, or $20,000. Fischer believes they should share this added income on the basis of their capital balances—60%, or $36,000, to Bell and 40%, or $24,000, to himself. Which partner is correct? Why?
2. Assume that the 2011 omission of $60,000 was an account payable for an operating expense. On what basis would the partners share this amount?