Nitty and Gritty are considering the formation of a partnership to operate a crafts and hobbies store. They have come to you to obtain information about the basic elements of a partnership agreement. These agreements usually specify an income and losssharing ratio. They also may provide for additional income and losssharing features such as salaries, bonuses, interest allowances on invested capital.

Required:

Discuss why a partnership agreement may need features in addition to the income and losssharing ratio. Discuss the arguments in favor of recording salary and bonus allowances to partners as expenses included in computing net income. What ethical issues may arise in a partnership agreement?