A partnership has reported profit for the year of £258,000 per the income statement. The partners had expected to make £300,000 so are not pleased with performance. The partnership has three partners (Simon, Mary and Anna). It is estimated that these partners would have earned the following amounts (Simon £90,000, Mary £80,000, Anna £65,000) had they been working elsewhere. The balance on Simon's capital account is £400,000, Mary's balance is £200,000 and Anna's is £300,000. The current rate of interest being earned on government gilts is 10%.
Given this information, what is the partnership abnormal profit/ (loss) for the year?

Question

Quizplus · Accepted Answer

The abnormal profit/loss is calculated by comparing the actual profit with the opportunity cost of the partners' time and capital. The opportunity cost of time is £235,000 (£90,000 + £80,000 + £65,000). The opportunity cost of capital is £90,000 (10% of £900,000 total capital). Total opportunity cost is £325,000. The actual profit is £258,000, resulting in an abnormal loss of £67,000 (£258,000 - £325,000).

A Partnership Has Reported Profit for the Year of £258,000