Bo and Diddley have decided to establish a partnership. Bo contributes $50,000 in cash; Diddley contributes $100,000 cash. They are evaluating two plans for a profit and loss sharing agreement:
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Plan A |
Bo to receive a salary of $15,000 per year, the balance to be divided between Bo and Diddley according to their opening capital balance ratios. |
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Plan B |
Bo to receive a salary of $12,000 per year; Bo and Diddley to receive 8 per cent interest per year each on their opening capital balances, and the balance of profit or loss to be split equally. |
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Required: |
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1. |
Calculate the division under each plan in the following schedule, assuming: (a) a profit of $60,000 per year, and (b) a loss of $30,000 per year. |
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2. |
Comment on the advantages and disadvantages of each plan. |
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