Rodriquez is one of your tax clients and has come to you seeking your input about a potential investment opportunity. Your client has the opportunity to acquire a 30% interest in the capital of a partnership. However, this would require him to give up his current job. The partnership will consist of Rodriquez, Monroe, and Zito, and the partners will allocate profits and losses as follows:
1. Salaries to Rodriquez and Monroe of $40,000 and $50,000, respectively.
2. Interest at the rate of 9% on weighted-average net capital in excess of $20,000. All partners are required to maintain $20,000 in their net capital accounts throughout the year. Net capital is defined in the partnership agreement as capital balances less drawing account balances.
It is estimated that in all cases, Monroe and Zito will maintain weighted-average net capital balances of $40,000 and $150,000, respectively. Unless otherwise stated, it is assumed that Rodriquez will maintain the minimum balance of net capital.
3. Bonus to Monroe of 5% of sales in excess of $500,000. It is estimated that sales for the year will be $650,000.
4. Profit and loss percentages of 40%, 40%, and 20% for partners Rodriquez, Monroe, and Zito, respectively.
Rodriquez is very interested in the opportunities that the partnership presents. However, he is concerned that his allocation of profits may not justify changing jobs.
Required
1. Determine how much partnership profit would have to be realized in order for Rodriquez’s allocated portion to equal his current job salary of $60,000.
2. Determine whether Rodriquez is best advised to withdraw available capital in excess of the minimum balance or retain capital in the partnership.
3. Assume that annual sales were less than $500,000 and that Rodriquez maintained the minimum net capital balance during the year. The other partners are assumed to maintain capital balances as stated. Furthermore, assume that all allocated profits are withdrawn. What is the minimum amount of partnership income that would be necessary in order for Rodriquez not to have to make an additional investment of capital?