Landow, Donovan, and Hansa, who are forming a partnership to operate an antiques gallery, are discussing how income and losses should be distributed. Among the facts they are considering are the following:
a. Landow will contribute cash for operations of $100,000, Donovan will contribute a collection of antiques that is valued at $300,000, and Hansa will not contribute any assets.
b. Landow and Hansa will handle day-to-day business operations. Hansa will work full-time, and Landow will devote about half-time to the partnership. Donovan will not devote time to day-to-day operations. A full-time clerk in a retail store would make about $20,000 in a year, and a full-time manager would receive about $30,000.
c. The current interest rate on long-term bonds is 8 percent.
Landow, Donovan, and Hansa have just hired you as the partnership’s accountant. Write a memorandum describing an equitable plan for distributing income and losses. Outline the reasons why you believe this plan is equitable. According to yours plan, which partner will gain the most if the partnership is very profitable, and which will lose the most if the partnership has large losses?