Question

A partnership begins 2020 with the following capital balances: Ash, Capital $60,000 Birch, Capital $80,000 Cottonwood, Capital $100,000

The Articles of Partnership stipulates that profits and losses will be assigned as follows: Each partner will be allocated interest equal to 10 percent of the beginning capital balance. Birch will be allocated a $20,000 "salary". Any remaining profits and losses will be allocated on a 3:4:3 basis, respectively.

A. Assuming that the net income for 2020 is $50,000, how much does each partner’s capital balance increase? Show all computations.

B. Each partner has withdrawn the maximum amount allowed, $5,000 per year. What is each partner’s final capital balance at year end?

Answer 1

Ans:

1.

Calculation of increase of capital balance :

Net profit : $50,000

Interest on capital :

Ash : $60,000 *10% = $6,000

Birch : $80,000 *10% = $8,000

Cottonwood : $100,000 * 10% = $10,000

Salary to Birch : $20,000

Balance of Net profit : $50,000 - $6,000 - $8,000 - $10,000 - $20,000 = $6,000

To be allocated in the Ratio of : 3:4:3

Ash : $6,000 * 3/10 = $1,800

Birch : $6,000 * 4/10 = $2,400

Cottonwood : $6,000 * 3/10 = $1,800

Each partner capital balance will increase by :

Ash : $6,000 + $1,800 = $7,800

Birch : $8,000 + $20,000 + $2,400 = $30,400

Cottonwood : $10,000 + $1,800 = $11,800

2.

If each partner withdraws $5,000; Capital balances will be : (Opening capital + Increase - withdrawal)

Ash : $60,000 + $7,800 - $5,000 = $62,800

Birch : $80,000 + $30,400 - $5,000 = $105,400

Cottonwood : $100,000 + $11,800 -$5,000 = $106,800

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