On August 1, 2012, Larry Goldstein and Rafi Hassan created a partnership to prod

ID: 2427863 • Letter: O

Question

On August 1, 2012, Larry Goldstein and Rafi Hassan created a partnership to produce software for online advertising. Goldstein was a lawyer and would handle all the legal matters, but Hassan was the technical whiz and would do all of the production and sales. Because most of the work would be done by Hassan, the partnership agreement specified that the yearly income would be split in a two-phase allocation. The first $100,000 of annual income would be split among Goldstein and Hassan in a 1:4 ratio (one part to Goldstein, four parts to Hassan.) Any income above $100,000 would be split evenly. At the onset, both men contributed $200,000 to the partnership and made no draws during 2012. At the end of 2012, the partnership earned $175,000 of net income. How much was allocated to Hassan?

Explanation / Answer

Calculation of Net income allocated to Hassan:

Total Net income earned for the year 2012

$ 175,000

Allocation to Hassan:

Allocation of first $100,000 of annual income (in the ratio 1:4) = 100000*4/5=

$ 80,000

Allocation of rest $75,000 of annual income (Equally) = 75000/2=

$ 37,500

Net income allocated to Hassan

$ 117,500