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Hello everyone
I believe that I had good understanding of the Partners Appropriation acct however I have come upon a scenario that I have not encountered previously.
When a new partner joins the partnership part way through the year, who will also receive an annual salary and a percentage is given for interest on capital eg Initially, 2 partners with equal profit share ratio takes on a new partner partner half way through the year who will receive an annual salary of £10,000 - Agreed interest on capital is 10%. Net profit of£125,000 for the year.
I believe that I need to deduct half the salary from the Net Profit and then split this in half and account for the 1st half of the period for the 2 original partners first.
Therefore: £125,000 minus £5,000 = £120,000 divided by 2 = £60,000 for first half of year
My problem now is to establish if I need to account for the Interest on capital in relation to the first 6 months for the original partners before calculating the Profit share for that period or does all the Interest on Capital get allocated at the year end only. In addition, would the new partner only receive half of the annual Interest on Capital as he has only invested for 6 months.
I am not looking for specific answers just guidance as to the rule that should be adopted when calculating the appropration when changes have occured to the partnerships during the year and when Capital of Interest is also required to be taken into account. My text books do not cover this scenario therefore any guidance would very much appreciated.
Kind regards to you all
Sarah xx
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