Question

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

Winston, Capital	$110,000
Durham, Capital	80,000
Salem, Capital	110,000

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 $10,000 per year.

The net loss for the first year of operations is $20,000 and net income for the subsequent year is $40,000. Each partner withdraws the maximum amount from the business each period.

1. How much of the net loss will be allocated to Winston’s capital account in year 1?
   1. $3,000
   2. $4,000
   3. $9,000
   4. $10,000
2. Refer to facts from question 1. How much of the net loss will be allocated to Durham’s capital account in Year 1?
   1. $4,000
   2. $8,000
   3. $9,000
   4. $10,000
3. Refer to facts from question 1. How much of the net loss will be allocated to Salem’s capital account in Year 1?
   1. $3,000
   2. $4,000
   3. $9,000
   4. $10,000
4. Refer to facts from question 1. What is the balance of Winston’s Capital account at the end of year 2?
   1. $91,000
   2. $111,000
   3. $55,200
   4. $102,600

Answer 1

Solution:

Assuming that the given profit (loss) is after giving the effect of all the expenses (such as Partner's salary and interest)

Allocation of Operating Profit (Loss)
Years	Particulars	Winston	Durhan	Salem	Total
1	(Loss)	-10,000	-4,000	-6,000	-20,000
2	Profit	20,000	8,000	12,000	40,000

Year 1
Particulars	Winston	Durhan	Salem	Total
Capital Account	1,10,000	80,000	1,10,000	3,00,000
Annual Salary	20,000	-	10,000	30,000
Interest	11,000	8,000	11,000	30,000
Remainder Amount	-10,000	-4,000	-6,000	-20,000
Withdrawals	-10,000	-10,000	-10,000	-30,000
Closing Amount	1,21,000	74,000	1,15,000	3,10,000

Year 2
Particulars	Winston	Durhan	Salem	Total
Capital Account	1,21,000	74,000	1,15,000	3,10,000
Annual Salary	20,000	-	10,000	30,000
Interest	12100	7400	11500	31,000
Remainder Amount	20000	8000	12000	40,000
Withdrawals	-10000	-10000	-10000	-30,000
Closing Amount	1,63,100	79,400	1,38,500	3,81,000

net loss will be allocated to Winston’s capital account in year 1 = $ 10,000

net loss will be allocated to Durham’s capital account in Year 1 = $ 4,000

net loss will be allocated to Salem’s capital account in Year 1 = $ 6,000

balance of Winston’s Capital account at the end of year 2 = $ 163,100

Note: If we assume that the effect of Partner's salary and Interest is not given then the Distribution amount does not match in the First 2 solutions does not match with the given option, therefore such an assumption is taken. However the given options in Question 3 and 4 does not match with our solution of 3 and 4. Even if we consider the above assumption of not. May be the given options are not correct.