Question

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

Winston, Capital	$	74,000
Durham, Capital		64,000
Salem, Capital		74,000

According to the articles of partnership, all profits will be assigned as follows:

• Winston will be awarded an annual salary of $10,000 with $5,000 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 $6,000 per year.

The net loss for the first year of operations is $28,000 and net income for the subsequent year is $31,000. 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

• $62,330

• $68,330

• $62,630

• $53,300

Answer 1

Solution

Partnership Accounts –

Determination of the balance in Winston’s capital account at the end of the second year:

	Winston	Durham	Salem	total
Opening balances, capital accounts	$74,000	$64,000	$74,000	$212,000
Interest at 10% on beginning balances	$7,400	$6,400	$7,400	$21,200
Salary	$10,000		$5,000	$15,000
Share of net loss	($32,100)	($12,840)	($19,260)	($64,200)
Withdrawals	($6,000)	($6,000)	($6,000)	($18,000)
Balance at end of year 1	$53,300	$51,560	$61,140	$166,000
Interest at 10% on beginning balances	$5,330	$5,156	$6,114	$16,600
Salary	$10,000		$5,000	$15,000
Share of net loss	($300)	($120)	($180)	($600)
Withdrawals	($6,000)	($6,000)	($6,000)	($18,000)
Balance at end of year 2	$62,330	$50,596	$66,074	$179,000

Hence, the balance in Winston’s capital account at the end of the second year = $62,330

Computations:

First year –

Interest at 10% on beg. Balances –

Winston = 74,000 x 10% = 7,400

Durham = 64,000 x 10% = 6,400

Salem = 74,000 x 10% = $7,400

Share of net loss –

Total net loss for first year –

Net loss = $28,000

Add: partners’ interest = 21,100

Add: salary = 15,000

Total net loss = $64,200

Winston share = 5/10 = 5/10 x 64,200 = $32,100

Durham share = 2/10 x 64,200 = $12,840

Salem share = 64,200 x 3/10 = $19,260

Second year –

Interest at 10% on beg. Balances –

Winston = 53,300 x 10% = 5,330

Durham = 51,560 x 10% = 5,156

Salem = 61,140 x 10% = 6,114

Share of net loss –

Total net loss-

Net profit in the second year = 31,000

Less: interest on capitals = (16,600)

Salary = (15,000)

Net loss = ($600)

Winston share in net loss = 600 x 5/10 = $300

Durham share = 600 x 2/10 = 120

Salem share = 600 x 3/10 = 180