ASSIGNMENT O1 Question 1 (30 marks: 54 minutes) OVERVIEW Mr Fish and Mr Sole hav
ID: 2542203 • Letter: A
Question
ASSIGNMENT O1 Question 1 (30 marks: 54 minutes) OVERVIEW Mr Fish and Mr Sole have been friends since they played rugby on the same team at university more than ten years ago. After completing their studies, Mr Fish moved to Gansbaai and Mr Sole to Arniston, where both began small fishing business. They both operated as sole proprietors, owing small fishing vessels and selling the daily catch to local restaurants, hotels and butcheries. Both business have been reasonably profitable, but sales have been confined to their local coastal towns. Formation of partnership Over a year ago they entered into discussions regarding the possibility of combining their operations and expanding their sales to customer in other coastal towns. They felt that by combining their business they would be able to share their resources, knowledge and skills. As the saying goes, no one of us is as smart as all of us'. In order to ensure that their operation ran as efficiently as possible, they invited Mr Lobster, a recently qualified chartered accountant, to join their business. Mr Lobster advised that the best way to run their business would be as a partnership, rather than by means of a company or close corporation. They decided to call the partnership Catching Something Fishy ('CSF'). Partnership agreement On 1 January 2010 a partnership agreement was drawn and CSF commenced trading. The partnership agreement stated the following a) b) Each partner will contribute R100 000 in cash. c) Mr Fish and Mr Sole will each contribute their fishing vessels, valued at R50 000 cach, to d) The partnership will use fixed capital accounts (this means that capital accounts will not e) the partnership change after the initial capital is contributed). Profits and Losses will be shared equally amongst the 3 partners. Mr Fish and Mr Sole are each entitled to receive a monthly salary of R5 000, WHILE Mr Lobster will receive a salary of R6 000 PER MONTH. f) g) Mr Fish will make a loan to the partnership of R200 000 ON 1 January 2010. The loan will attract interest at a rate of 10% per annum (year). Interested will be paid in arrears on 31 December each year Interest of 2% per annum will be charged on capital account balances. h)Explanation / Answer
* There is an opportunity for income spilling, there is an advantageof particular importance due to resulant tax savings in partnership rather than in company.
* Managemnt and Investors will be one in one in partnership, better control of management affairs in partnership rather than in company, because Investors and management differs in company.
* Maintenancy of secrecy will be more effective in partnership rather than in company.