Chapter Review
12-7iCases & Projects
Ethics in Action
Taye Barrow, M.D., and James Robbins, M.D., are sole owners of two medical practices that operate in the same medical building. The two doctors agree to combine assets and liabilities of the two businesses to form a partnership. The partnership agreement calls for dividing income equally between the two doctors. After several months, the following conversation takes place between the two doctors:
I’ve noticed that your patient load has dropped over the last couple of months. When we formed our partnership, we were seeing about the same number of patients per week. However, now our patient records show that you have been seeing about half as many patients as I have. Are there any issues that I should be aware of?
There’s nothing going on. When I was working on my own, I was really putting in the hours. One of the reasons I formed this partnership was to enjoy life a little more and scale back a little bit.
I see. Well, I find that I’m working as hard as I did when I was on my own yet making less than I did previously. Essentially, you’re sharing in half of my billings and I’m sharing in half of yours. Since you are working much less than I am, I end up on the short end of the bargain.
Well, I don’t know what to say. An agreement is an agreement. The partnership is based on a 50/50 split. That’s what a partnership is all about.
If that’s so, then it applies equally well on the effort end of the equation as it does on the income end.
-
Discuss whether Robbins is acting in an ethical manner. How could Barrow renegotiate the partnership agreement to avoid this dispute?
Team Activity
In groups of two or three, find the most recent “Accounting Today Top 100 Firms” on the Internet.
-
From this document, create an Excel spreadsheet of the total revenues and total partners for Deloitte & Touche, PwC, Ernst & Young, and KPMG.
-
Determine the revenue per partner for each of these four firms. Round to the nearest dollar.
-
Develop a table of the revenue earned per partner of each of these four firms as a percent of the highest revenue per partner firm. Round to the nearest whole percentage.
-
Interpret the differences between the firms in terms of your answer in (c).
Communication
Lindsey Wilson has agreed to invest $200,000 into an LLC with Lacy Lovett and Justin Lassiter. Lovett and Lassiter will not invest any money but will provide effort and expertise to the LLC. Lovett and Lassiter have agreed that the net income of the LLC should be divided so that Wilson is to receive a 10% preferred return on her capital investment prior to any remaining income being divided equally among the partners. In addition, Lovett and Lassiter have suggested that the operating agreement be written so that all matters are settled by majority vote, with each partner having a one-third voting interest in the LLC.
-
If you were providing Lindsey Wilson counsel, what might you suggest in forming the final agreement?
Dividing partnership income
Terry Willard and Jasmine Hill decide to form a partnership. Willard will contribute $300,000 to the partnership, while Hill will contribute only $30,000. However, Hill will be responsible for running the day-to-day operations of the partnership, which are anticipated to require about 45 hours per week. In contrast, Willard will only work five hours per week for the partnership. The two partners are attempting to determine a formula for dividing partnership net income. Willard believes the partners should divide income in the ratio of 7:3, favoring Willard, since Willard provides the majority of the capital. Hill believes the income should be divided 7:3, favoring Hill, since Hill provides the majority of effort in running the partnership business.
-
How would you advise the partners in developing a method for dividing income?