Question

Cleary, Wasser, and Nolan formed a partnership on January 1, 2021, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2021 and $180,000 in 2022. Each partner withdrew $1,000 for personal use every month during 2021 and 2022.What was Cleary's capital balance at the end of 2021?

a. $100,000.
b. $117,000.
c. $119,000.
d. $129,000.
e. $153,000.

Answer 1

After calculating Cleary's initial investment, interest, share of net income, and subtracting the annual withdrawals, Cleary's capital balance at the end of 2021 is $117,000.

Step-by-step explanation:

To calculate Cleary's capital balance at the end of 2021, we need to consider the initial investment, interest on capital, compensation (if any), share of the net income after interest and compensation, and any withdrawals made by the partner during the year.

Initial investment for Cleary was $100,000. Cleary is entitled to 10% interest on this investment, which equals $10,000. Wasser receives an annual compensation of $10,000, which does not affect Cleary’s balance. The remainder of the net income for 2021, after interest and compensation, is $150,000 - $10,000 (Cleary's interest) - $15,000 (Wasser's interest) - $20,000 (Nolan's interest) - $10,000 (Wasser's compensation) = $95,000. Cleary has a 20% share of this, which equals $19,000.

The total withdrawals by Cleary during 2021 amount to $1,000 x 12 = $12,000. Adding the interest and share of profits to Cleary's initial investment and then subtracting the withdrawals gives us his ending capital balance: $100,000 + $10,000 + $19,000 - $12,000 = $117,000.