Question

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

Winston, Capital	$	56,000
Durham, Capital		46,000
Salem, Capital		56,000

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

Winston will be awarded an annual salary of $16,000 with $8,000 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 $7,000 per year.

The net loss for the first year of operations is $22,000 and net income for the subsequent year is $27,000. 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?

Answer 1

balance in Winston’s capital account at the end of the second year= $48,420

Calculations

	Winston Capital	Durham Capital	Salem Capital	Profit Balance
Opening Capital Year 1	$          56,000.00	$   46,000.00	$         56,000.00	$ (22,000.00)
Add: Interest On capital	$            5,600.00	$      4,600.00	$            5,600.00	$ (15,800.00)
Add: Salary	$          16,000.00		$            8,000.00	$ (24,000.00)
Less: Drawings	$          (7,000.00)	$   (7,000.00)	$         (7,000.00)
Less: Loss Share	$        (30,900.00)	$ (12,360.00)	$       (18,540.00)	$ (61,800.00)
Closing Balance Of year 1	$          39,700.00	$   31,240.00	$         44,060.00
Opening Balance of Year 2	$          39,700.00	$   31,240.00	$         44,060.00	$ 27000.00
Add: Interest On capital	$            3,970.00	$      3,124.00	$            4,406.00	$ (11,500.00)
less: Drawings	$          (7,000.00)	$   (7,000.00)	$         (7,000.00)
Add: Salary	$          16,000.00		$            8,000.00	$ (24,000.00)
Less: Loss Share	$          (4,250.00)	$   (1,700.00)	$         (2,550.00)	$    (8,500.00)
Closing balance of Year 2	$          48,420.00	$   25,664.00	$         46,916.00

Loss For Year 1
Operating Loss	$          22,000.00
Add: Salary	$          24,000.00
Add: Interest on Capital	$          15,800.00
Total Loss of Year 1 To be distributed to Partners	$          61,800.00

Loss For Year 2
Operating Profit	$          27,000.00
Less: Salary	$       24,000.00
Less: Interest on Capital	$        11,500.00
Total Loss of Year 2 To be distributed to Partners	$         8,500.00