Ellis Taylor has operated a successful motorcycle repair business for the past several years. Taylor thinks his business is almost too successful because he has very little time for himself. Taylor and Jane Ruby, who is also a motorcycle enthusiast, have had a number of discussions about her joining him in the business. Finally, they agree to form a partnership that will operate under the name TR Motorcycle Repair Shop. They have asked you to provide assistance, particularly with help in establishing terms for dividing partnership profits and losses.

The partners give you the following information about their plans for the business:

a. Taylor plans to contribute to the partnership the assets of his sole proprietorship. They have been appraised to have a fair market value of $750,000.

b. Ruby will invest $1,000,000 in cash.

c. Taylor will work full-time in the business while Ruby will work part-time and continue to attend the class she is taking in pursuit of a college degree.

Assume that TR Motorcycle Repair earned a net income of $490,000 during its first year of operation.

Instructions

1. What division of profits and losses would you suggest for Taylor and Ruby?

2. Using your proposed plan of profit sharing, prepare a schedule showing the distribution of the first year's net income to the partners.