The Most Appropriate Basis for Dividing Partnership Net Income When

question 206

Multiple Choice

The most appropriate basis for dividing partnership net income when the partners do not plan to take an active role in daily operations is

• A) on a fixed ratio.
• B) interest on capital balances and salaries to the partners.
• C) on a ratio based on average capital balances.
• D) salaries to the partners and the remainder on a fixed ratio.

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Definitions:

Economic Profit

The difference between a firm's total revenue and its total costs, including both explicit and implicit costs, representing excess return over opportunity costs.

Rate of Return

The gain or loss on an investment over a specified time period, expressed as a percentage of the investment's initial cost.

Assets

Items of value owned by individuals, companies, or governments, including tangible items like real estate and equipment, and intangible items like patents and trademarks.

Explicit Cost

Direct, out-of-pocket payments for goods or services that a company incurs in the course of doing business.