Conceptual Understanding: Distribution of Partnership Income and Losses

Landow, Donovan, and Hansa, who are forming a partnership to operate an antiques gallery, are discussing how income and losses should be distributed. Among the facts they are considering are the following:

Landow will contribute cash for operations of $100,000, Donovan will contribute a collection of antiques that is valued at $300,000, and Hansa will not contribute any assets.

Landow and Hansa will handle day-to-day business operations. Hansa will work full-time, and Landow will devote about half-time to the partnership. Donovan will not devote time to day-to-day operations. A full-time clerk in a retail store would make about $20,000 in a year, and a full-time manager would receive about $30,000.

The current interest rate on long-term bonds is 8 percent.

Landow, Donovan, and Hansa have just hired you as the partnership's accountant.

1. Write a short memorandum describing an equitable plan for distributing income and losses.