Question

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

Answer 1

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