Question

Purkerson, Smith, and Traynor have operated a bookstore for a number of years as a partnership. At the beginning of 2018, capital balances were as follows:

Purkerson	$	62,000
Smith		42,000
Traynor		20,000

Due to a cash shortage, Purkerson invests an additional $16,000 in the business on April 1, 2018.

Each partner is allowed to withdraw $1,000 cash each month.

The partners have used the same method of allocating profits and losses since the business's inception:

• Each partner is given the following compensation allowance for work done in the business: Purkerson, $10,000; Smith, $26,000; and Traynor, $6,000.
• Each partner is credited with interest equal to 10 percent of the average monthly capital balance for the year without regard for normal drawings.
• Any remaining profit or loss is allocated 2:3:5 to Purkerson, Smith, and Traynor, respectively. The net income for 2018 is $38,000. Each partner withdraws the allotted amount each month.

What are the ending capital balances for 2018?

Answer 1

Allocation of net income

	Purkerson	Smith	Traynor	Totals
Net income				$38,000
Interest (10%)	$7,400 (below)	$4,200	$2,000	($13,600)
Salary	$10,000	$26,000	$6,000	($42,000)
Remainder to allocate:				($17,600)
	($3,520)	($5,280)	($8,800)	$17,600
Totals	$13,880	$24,920	($800)	0

Calculation of Purkerson's interest allocation

Balance, January 1 to April 1 ($62,000 * 3) = $186,000

Balance, April 1 to December 31 ($78,000 * 9) = $702,000

Total = $888,000

Months = 12

Average monthly capital balance = $888,000/12 = $74,000

Interest rate = 10%

Interest rate allocation (above) = $74,000 * 10% = $7,400

Statement of Partner’s Capital

	Purkerson	Smith	Traynor	Totals
Beginning balances	$62,000	$42,000	$20,000	$124,000
Additional contribution	$16,000	0	0	$16,000
Net income (above)	$13,880	$24,920	($800)	$38,000
Drawings ($1,000 per month)	($12,000)	($12,000)	($12,000)	($36,000)
Ending capital balances	$79,880	$54,920	$7,200	$142,000