Question

The articles of partnership stipulate that profits and losses be assigned in the following manner: ∙ Each partner is allocated interest equal to 5 percent of the beginning capital balance. ∙ Bernard is allocated compensation of $18,000 per year. ∙ Any remaining profits and losses are allocated on a 3:3:4 basis, respectively. ∙ Each partner is allowed to withdraw up to $5,000 cash per year. Assuming that the net income is $60,000 and that each partner withdraws the maximum amount allowed, what is the balance in Collins capital account at the end of that year?

Answer 1

$80,700

Step-by-step explanation:

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

• Alfred, Capital $50,000
• Bernard, Capital $60,000
• Collins, Capital $70,000

the partnership's net profits should be allocated the following way (drawings made by the partners should decrease their basis, but since the company made a profit they can be included in this distribution)

net income $60,000

partners' drawings plus salaries:

• Alfred ⇒ $5,000
• Bernard ⇒ $18,000 + $5,000 = $23,000
• Collins ⇒ $5,000

interests owed to partners:

• Alfred ⇒ $50,000 x 5% = $2,500
• Bernard ⇒ $60,000 x 5% = $3,000
• Collins ⇒ $70,000 x 5% = $3,500

the remaining $18,000 should be distributed:

• Alfred ⇒ $18,000 x 30% = $5,400
• Bernard ⇒ $18,000 + 30% = $5,400
• Collins ⇒ $18,000 x 40% = $7,200

Collins's basis should increase by $3,500 + $7,200 = $10,700, ending balance = $70,000 + $10,700 = $80,700