Question

Alpha, Beta, and Gamma established a partnership. The partnership rules state that income will be distributed by:1) Alpha receives $12,000 salary (2) each partner receives 7% interest on average capital balances (3) remaining income is distributed 1:2:1 (Alpha, Beta, Gamma). The amount draw exceeds income for any partner must be contributed back to the partnership

The year begins with capital as follows: Alpha = $50,000, Beta = $75,000, Gamma = $50,000. During the year, Alpha had draw of $10,000 taken July 1, Gamma took draw of $5,000 on May 1 and another $5,000 on September 1, and Beta took $12,000 draw on January 1.

There are two independent situations. In situation #1, the partnership earns $88,002. In situation #2, the partnership earns $23,000. For each of these, what would be the amount of income distributed to each partner? What would be the ending capital balance for each partner?

Answer 1

Situation #1

Working Notes:

Calculation of interest on Capital:

Interest on Capital = 7% on average capital balances

In this case, we will apply weighted average method

Alpha

Date	capital(A)	Period (B)	Product (AB)
Jan1 to June 30	$50,000	6	$300,000
July 1 to Dec 31	$40,000	6	$240,000
Sum of product			540,000

Interest on Alpha's capital = 540,0007%1/12=$3,150

Beta

Date	capital(A)	Period (B)	Product (AB)
Jan1 to Dec 30	$50,000-$12,000 = $63,000	12	$756,000
Sum of product			$756,000

Interest on Beta's capital = 756,0007%1/12=$4,410

Gamma

Date	capital(A)	Period (B)	Product (AB)
Jan1 to April 30	$50,000	4	$200,000
May 1 to Aug 31	$45,000	4	$180,000
Sept 1 to Dec 31	$40,000	4	$160,000
Sum of product			$540,000

Interest on Gamma's capital = 540,0007%1/12=$3,150

Distribution of the amount of income among each partner:

Distribution of remaining income after salary and interest on capital

=Net Profit-Alpha's salary - Interest of capital

=88,002-12,000-10,710(3,150+4,410+3,150) = $65,292 (remaining Profit)

Distribution of remaining profit among Alpha, Beta and Gamma in the ratio of 1:2:1

Alpha=$65,2921/4=$16,323

Beta=$65,2922/4=$32,646

Gamma=$65,2921/4=$16,323

Amount of income to each partner:

Partners	Alpha	Beta	Gamma
Salary	$12,000
Interest on capital	3,150	4,410	3,150
Profit(1:2:1)	16,323	32,646	16,323
Total income	$31,473	$37,056	$19,473

Ending Capital balances for each partner:

Partners	Alpha	Beta	Gamma
Opening capital	$50,000	$75,000	$50,000
income	$31,473	$37,056	$19,473
Closing Capital	$81,473	$112,056	$69,473

Situation #2

Distribution of the amount of income among each partner:

Distribution of remaining income after salary and interest on capital

=Net Profit-Alpha's salary - Interest of capital

=23,000-12,000-10,710(3,150+4,410+3,150) = $290 (remaining Profit)

Distribution of remaining profit among Alpha, Beta and Gamma in the ratio of 1:2:1

Alpha=$2901/4=$72.50

Beta=$2902/4=$145

Gamma=$2901/4=$72.50

Amount of income to each partner:

Partners	Alpha	Beta	Gamma
Salary	$12,000.00
Interest on capital	3,150.00	4,410.00	3,150.00
Profit(1:2:1)	72.50	145.00	72.50
Total income	$15,222.50	4,555.00	$3,222.50

Ending Capital balances for each partner:

Partners	Alpha	Beta	Gamma
Opening capital	$50,000.00	$75,000.00	$50,000.00
income	$15,222.50	$4,555.00	$3,222.50
Closing Capital	$65,222.50	$79,555.00	$53,222.50