P and Q launched a venture contributing Rs. 4 lakhs and Rs. 10 lakhs respectively. P draws a monthly salary of Rs. 5000 for managing operations. If the annual profit reached Rs. 2 lakhs, what is the earnings ratio between them?
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Answer: D. 1 : 1
Explanation
P draws a monthly management salary which is deducted from the annual profit pool before distribution. After accounting for management compensation, the remaining profit is divided between partners based on capital. Adjusting for capital contributions and salary allocations results in equal net earnings, giving a one to one ratio. Partnership agreements often compensate managing partners with salaries before distributing remaining profits by capital. Net profit equals gross annual earnings minus all authorized operational management expenses and partner salaries. An earnings ratio compares the final monetary distributions received by each participating partner.
Corporate compensation committees evaluate executive salaries and profit sharing structures for business partners. Small business accounting standards require separating operational wages from capital dividend disbursements. Partnership contract disputes are resolved by reviewing how management salaries impact final profit allocations. Option A ignores the management salary deduction and relies solely on raw capital proportions. Option B incorrectly weights the capital contributions without accounting for management compensation. Option C miscalculates the adjusted profit distribution resulting in an incorrect earnings ratio.
- Subject
- Mathematics
- Category
- Mathematics
- Topic
- —
- Difficulty
- medium
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