Question

A partnership begins its first year of operations with the following capital balances:

Winston, Capital	$	62,000
Durham, Capital		52,000
Salem, Capital		62,000

According to the articles of partnership, all profits will be assigned as follows:

• Winston will be awarded an annual salary of $10,000 with $5,000 assigned to Salem.
• The partners will be attributed interest equal to 10 percent of the capital balance as of the first day of the year.
• The remainder will be assigned on a 5:2:3 basis, respectively.
• Each partner is allowed to withdraw up to $5,000 per year.

The net loss for the first year of operations is $24,000 and net income for the subsequent year is $25,000. Each partner withdraws the maximum amount from the business each period. What is the balance in Winston’s capital account at the end of the second year?

Multiple Choice

• $52,540

• $54,390

• $44,900

• $57,540

Answer 1

Correct Answer:

Winston Capital at the end of 2^nd year: $ 52,540

Working:

	Winston Capital		Durham Capital	Salem Capital	Profit Balance
Opening Capital Year 1	$          62,000.00		$   52,000.00	$         62,000.00	$        (24,000.00)
Add: Interest On capital @10%	$            6,200.00		$      5,200.00	$            6,200.00	$        (17,600.00)
Add: Salary	$          10,000.00			$            5,000.00	$        (15,000.00)
Less: Drawings	$          (5,000.00)		$   (5,000.00)	$         (5,000.00)
Less: Loss Share	$        (28,300.00)		$ (11,320.00)	$       (16,980.00)	$        (56,600.00)
Closing Balance Of year 1	$          44,900.00		$   40,880.00	$         51,220.00
Opening Balance of Year 2	$          44,900.00		$   40,880.00	$         51,220.00	25000
Add: Interest On capital @ 10%	$            4,490.00		$      4,088.00	$            5,122.00	$        (13,700.00)
less: Drawings	$          (5,000.00)		$   (5,000.00)	$         (5,000.00)
Add: Salary	$          10,000.00			$            5,000.00	$        (15,000.00)
Less: Loss Share	$          (1,850.00)		$       (740.00)	$         (1,110.00)	$          (3,700.00)
Closing balance of Year 2	$          52,540.00		$   39,228.00	$         55,232.00

End of answer.

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