Question

Assume that there are three partners in a partnership, A, B, and C. Partner C provides services to the partnership and is entitled to a salary of $75,000. In addition, assume that the Partnership Agreement provides for an interest allocation of 5% based on the weighted-average Capital Account balance during the year. There is a balance in each Capital Account for Partners A and B of $750,000 for the full year. Partner C, however, was admitted to the partnership for an initial capital contribution of $450,000 on March 31. Finally, assume that the partnership revenues less expenses (other than salary to Partner C and interest on capital balances) are $600,000, and that the Partnership Agreement provides for a sharing ratio of 40%/40%/20% for Partners A, B, and C, respectively.

Prepare a schedule for the allocation of profit to the partners.

Answer 1

Partner A will receive $37,500 in interests on capital and $173,250 as share of net profits.

Partner B will receive $37,500 in interests on capital and $173,250 as share of net profits.

Partner C will receive $75,000 in salaries, $16,875 in interests on capital and $86,625 as share of net profits.

Step-by-step explanation:

net income before salary to partner C and interest on capital = $600,000

• partner C's salary = $75,000
• partner A's capital balance = $750,000 x 5% = $37,500
• partner B's capital balance = $750,000 x 5% = $37,500
• partner C's capital balance = $450,000 x 5% x 9/12 = $16,875

net income after allocation of salaries and interests = $600,000 - $166,875 = $433,125

• partner A's share of net income = $433,125 x 40% = $173,250
• partner B's share of net income = $433,125 x 40% = $173,250
• partner C's share of net income = $433,125 x 20% = $86,625

Partner A will receive $37,500 in interests on capital and $173,250 as share of net profits.

Partner B will receive $37,500 in interests on capital and $173,250 as share of net profits.

Partner C will receive $75,000 in salaries, $16,875 in interests on capital and $86,625 as share of net profits.