Question

A partnership begins its first year of operations with the following capital balances:

Winston, Capital $ 58,000

Durham, Capital 48,000

Salem, Capital 58,000

According to the articles of partnership, all profits will be assigned as follows: Winston will be awarded an annual salary of $18,000 with $9,000 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 $10,000 per year. The net loss for the first year of operations is $22,000 and net income for the subsequent year is $28,000. 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?

Answer 1

Calculation of First year ending Capital Balances:
Calculation of First year Total Net loss:
Net loss	$ 22,000
Add: Salary (18000+9000)	$ 27,000
Interest on capital	$ 16,400
Total Loss	$ 65,400
Distribution of loss:
	Winston	Durham	Salem
Sharing Ratio	5	2	3
Total Net loss	$ 32,700	$ 13,080	$ 19,620
Calculating of Capital Balances of First Year ending:
	Winston	Durham	Salem
Beginning Capital Balances	$ 58,000	$ 48,000	$ 58,000
Withdrawals	$ -10,000	$ -10,000	$ -10,000
Salary	$ 18,000		$     9,000
Distribution of losses	$ -32,700	$ -13,080	$ -19,620
Interest on beginning day capital	$     5,800	$     4,800	$     5,800
First year Ending Capital Balances	$ 39,100	$ 29,720	$ 43,180
Calculation of Second year ending Capital Balances:
Calculation of Second year Total Net loss:
Net Income	$ 28,000
Add: Salary (18000+9000)	$ -27,000
Interest on capital	$ -11,200
Total Loss	$ -10,200
Distribution of loss:
	Winston	Durham	Salem
Sharing Ratio	5	2	3
Total Net loss	$     5,100	$     2,040	$     3,060
Calculating of Capital Balances of Second Year ending:
	Winston	Durham	Salem
Beginning Capital Balances	$ 39,100	$ 29,720	$ 43,180
Withdrawals	$ -10,000	$ -10,000	$ -10,000
Salary	$ 18,000		$     9,000
Distribution of losses	$   -5,100	$   -2,040	$   -3,060
Interest on beginning day capital	$     3,910	$     2,972	$     4,318
First year Ending Capital Balances	$ 45,910	$ 20,652	$ 43,438