Lori Barclay invested $30,000 and Vanesa Resultan invested $15,000 in a public relations firm that has operated for 10 years. Neither partner has made an additional investment. They have shared profits and losses in the ratio of 2:1, which is the ratio of their investments in the business. Barclay manages the office, supervises the 16 employees, and does the accounting.

Resultan, the moderator of a television talk show, is responsible for marketing. Her high profile generates important revenue for the business. During the year ended December 2020, the partnership earned net income of $75,000, shared in the 2:1 ratio. On December 31, 2020, Barclay’s Capital balance was $152,500 and Resultan’s Capital balance was $105,000.

Required

Respond to each of the following situations:

1. What explains the difference between the ratio of partner Capital balances at December 31, 2020, and the 2:1 ratio of partner investments and profit sharing?

2. Resultan believes the profit-and-loss-sharing ratio is unfair. She proposes a change, but Barclay insists on keeping the 2:1 ratio. What two factors may underlie Resultan’s unhappiness?

3. During January 2020, Barclay learned that revenues of $24,000 were omitted from the reported 2019 income. She brings this to Resultan’s attention, pointing out that her share of this added income is two-thirds, or $16,000, and Resultan’s share is one-third, or $8,000. Resultan believes they should share this added income based on their Capital balances: 60 percent (or $14,400) to Barclay, and 40 percent (or $9,600) to Resultan. Which partner is correct? Why?

4. Assume that an account payable of $18,000 for an operating expense in 2019 was omitted from 2019 reported income. On what basis would the partners share this amount?