A and B, calendar year individuals, are partners in the AB general partnership to which they each contributed $100 cash. Their interest under the partnership agreement are as follows:

	As percentages	Bs percentages
Capital	50	50
Profits	60	40
Losses	30	70

Capital accounts (including deficit restoration obligations) will be followed in making all distributions, both current and liquidating.

During the first year of operations, AB loses $100. In the second year of operations, AB loses $100. In the third year of operations, AB has $200 of net income. Please prepare a balance sheet that reflects the situation at the end of each of the three years of operation.

1. How would AB allocate profits and losses for the first three years of operations?
2. If AB were to liquidate at the end, alternatively, of each of the first three years of operations, who would receive what?

What if, in June of Year 3, when it looks as though AB will earn about $200, A and B amend the partnership agreement to adjust their profit shares for Year 3 only: A goes from 60$ to 30%; B goes from 40% to 70%. What effect might that have on your conclusions about the allocation of tax losses in years 1 and 2 and the allocation of bottom line income in year 3?