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

Option 1st is correct. i.e $67,240

Winston Capital at the end of 2nd year: $ 67.240
Working:
	Winston Capital	Durham Capital	Salem Capital	Profit Balance
Opening Capital Year 1	72,000	62,000	72,000	-28,000
Add: Interest On capital @10%	7,200	6,200	7,200	-20,600
Add: Salary	20,000		10,000	-30,000
Less: Drawings	-5,000	-5,000	-5,000
Less: Loss Share	-39,300	-15,720	-23,580	-78,600
Closing Balance Of year 1	54,900	47,480	60,620
Opening Balance of Year 2	54,900	47,480	60,620	30,000
Add: Interest On capital @ 10%	5,490	4,748	6,062	-16,300
less: Drawings	-5,000	-5,000	-5,000
Add: Salary	20,000		10,000	-30,000
Less: Loss Share	-8,150	-3,260	-4,890	-16,300
Closing balance of Year 2	67,240	43,968	66,792