I'm hoping someone can point me in the right direction as this is the first time I'm dealing with this type of situation.
I'm keeping the books for a partnership that originally had 2 partners and I'll be soon dealing with the appropriation of profits at the year end. They admitted a new partner 8 months into the accounting year, so the new partner has been in the partnership only for the last 4 months of the accounting year. The new partnership agreement (not very clear!) states that the new partner is entitled to a salary and the salary is quoted per year. I'm pretty sure the new partner should be entitled to 4/12th of the salary as he's been in the partnership only for 4 months of the year. Does anyone disagree with this? If yes please let me know as that's what I'd do.
My issue is with the interest on capital. The partnership agreement states that the partners are entitled to an interest of 6% per annum on their capital to be paid annually. The issue is that the balance of the capital accounts of the old partners did not remain the same all year, it was modified by adding a share of the goodwill when the new partner was admitted. I'm unsure if the interest should be calculated considering the opening balance of the capital accounts at the start of the year (ignoring the later increase due to goodwill) or if I should consider the increased balance for the last 4 months of the year. I'm unsure because the old partners did not pay in the additional capital, it was just an adjustment due to the goodwill. Unfortunately the partnership agreement is not clear about this. It would be really helpful to hear the opinion of some more experienced bookkeeper, someone who dealt with the same type of situation in the past. Any help is greatly appreciated.
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I haven't touched on this subject for a number of years, but I think you are correct on the 4/12 salary as it sounds reasonable and fair.
Last time I did anything like this we used a daily calculation based on the balance each day at (in your case) 6% /365 to work out the Interest per day.
This was all done on spreadsheet and took a bit of work as we compounded the interest, but if your not compounding it then you should be able to work out the number of days from the opening balance to day it increased due to goodwill, and then the number of days from the increase to the year end.
There is an average method based on opening and closing balance but but this wasn't very accurate.
