Question

A partnership has the following capital balances: Allen, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000 Burns, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 Costello, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 Profits and losses are split as follows: Allen (20 percent), Burns (30 percent), and Costello (50 percent). Costello wants to leave the partnership and is paid $100,000 from the business based on provisions in the articles of partnership. If the partnership uses the bonus method, what is the balance of Burns’s capital account after Costello withdraws?

Answer 1

$24,000

Step-by-step explanation:

Allen, Capital $60,000 (20% profits)

Burns, Capital $30,000 (30% profits)

Costello, Capital $90,000 (50% profits)

To determine the balance in Burns's account using the bonus method, we must first determine the bonus to be allocated between Burns and Allen:

bonus = amount paid to Costello - Costello's basis = $100,000 - $90,000 = $10,000

now the bonus ($10,000) must be allocated in the same way as profits or losses:

Allen, Capital ⇒ 20% profits

Burns, Capital ⇒ 30% profits

total 50%, so Burns should be allocated 3/5 of the bonus = $10,000 x 3/5 = $6,000

Burns's capital account = original capital balance - allocated bonus = $30,000 - $6,000 = $24,000