Dee, Ern & Fay LLP, whose partners share net income and losses equally, had an operating income of $30,000 for the first year of operations. However, near the end of that year, the partners learned of two unfavorable developments:

(a) the bankruptcy of Sasha Company, maker of a two-year promissory note for $20,000 payable to Partner Dee that had been indorsed in blank to the partnership by Dee at face amount as Dee’s original investment, and

(b) the appearance on the market of new competing patented devices that rendered worthless a patent with a carrying amount of $10,000 that had been invested in the partnership by Ern as part of Ern’s original investment.

Dee, Ern & Fay LLP had retained the promissory note made by Sasha Company with the expectation of discounting it when cash was needed. Quarterly interest payments had been received regularly prior to the bankruptcy of Sasha, but present prospects were for no further collections of interest or principal.

Fay argues that the $30,000 operating income should be divided $10,000 to each partner, with the $20,000 loss on the uncollectible note debited to Dee’s capital account and the

$10,000 loss on the worthless patent debited to Ern’s capital account.

Instructions Do you agree with Fay? Explain.