Question

In: Accounting

A partnership begins its first year of operations with the following capital balances: Winston, Capital $...

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

Winston, Capital $ 72,000
Durham, Capital 62,000
Salem, Capital 72,000

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

  • Winston will be awarded an annual salary of $20,000 with $10,000 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 $28,000 and net income for the subsequent year is $30,000. 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

  • $67,240

  • $54,900

  • $75,390

  • $72,240

Solutions

Expert Solution

Income Allocation in Year-1
Winston Durham Salem Total
Net loss -28000
Less: Salary allowace 20000 10,000 -30000
Total Loss -58,000
Less: Interest allowance 7200 6200 7,200 -20600
Total loss -78,600
Shares in 5:2:3 -39300 -15720 -23,580 78600
Share of Profit (loss) -12,100 -9,520 -6,380 0
Capital balance at end of Year-1
Winston Durham Salem Total
Beginning baalnce of Capital 72000 62,000 72,000 206000
Add: Net Income (loss) -12100 -9520 -6380 -28000
Less: Withdrawals -5000 -5000 -5,000 -15000
Ending balance of capital 54900 47,480 60,620 163000
Income Allocation in Year-2
Winston Durham Salem Total
Net income 30000
Less: Salary allowace 20000 10,000 -30000
Remaing income 0
Less: Interest allowance 5490 4748 6,062 16300
Total loss -16,300
Shares in 5:2:3 -8150 -3260 -4,890 16300
Share of Profit (loss) 17,340 1,488 11,172 30,000
Capital balance at end of Year-2
Winston Durham Salem Total
Beginning baalnce of Capital 54900 47,480 60,620 163000
Add: Net Income (loss) 17340 1488 11172 30000
Less: Withdrawals -5000 -5000 -5,000 -15000
Ending balance of capital 67240 43,968 66,792 178000
Answer is $ 67,240

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