Question

A partnership began its first year of operations with the following capital balances: Issam, Capital: $143,000 Ziad, Capital: $104,000 Mazen, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Issam was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Mazen. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Issam, Ziad, and Mazen, respectively. Each partner withdrew $15,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Assam's Capital account at the end of the first year?   A. $116,300   B. $118,300   C. $120,900   D. $126,100

Answer 1

Answer: Option A: $ 116,300

Computation of Issam capital account at the end of first year is as follows:

Particular	Amount
Opening capital balance	$       1,43,000
Add: Interest on capital	$           14,300
Add: Salary	$           26,000
Less: Withdrawal	$           15,000
Less: Share in loss (WN 3)	$           52,000
Ending capital balance	$       1,16,300

Thus, Balance in issam's Capital account at the end of the first year is $ 116,300 (Answer is Option A. $ 116,300)

WN:1

Calculation of Profit of Partnership:

Particular	Amount
Net loss from operations	$           26,000
Add: Issam Salary	$           26,000
Add: Mazen Salary	$           13,000
Add: Interest on capital (WN 2)	$           39,000
Total Loss	$       1,04,000

WN:2

Interest on capital

Partners	Opening capital balance	Interest	Interest
	(i)	(ii)	(i)*(ii)
Issam	$       1,43,000	10%	$ 14,300
Ziad	$       1,04,000	10%	$ 10,400
Mazen	$       1,43,000	10%	$ 14,300
Total			$ 39,000

WN:3

Share in loss of issam

Profit or loss sharing ratio is 5:2:3 for issam , Ziad & Mazen respectively.

Thus, Issam sharing ratio is 5/10

Thus, Share in loss of issam = Total loss * issam share ratio

= $ 1,04,000 * ( 5/10 )

= $ 52,000