Question

A partnership begins its first year of operations with the following capital balances: Winston, Capital $ 98,000 Durham, Capital 88,000 Salem, Capital 98,000 According to the articles of partnership, all profits will be assigned as follows: Winston will be awarded an annual salary of $10,000 with $5,000 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 $36,000 and net income for the subsequent year is $31,000. Each partner withdraws the maximum amount from the business each period. What is the balance in Winston’s capital account at the end of the second year?

2.

Following are the capital account balances for the William, Jennings, and Bryan partnership:

William (45% of gains and losses)	$	300,000
Jennings (45%)		250,000
Bryan (10%)		230,000

Darrow invests $345,000 in cash for a 30 percent ownership interest. The money goes to the business. No goodwill or other revaluation is to be recorded. After the transaction, what is Jennings’s capital balance?

Answer 1

1)

First Year
	Winston	Durham	Salem
Opening Capital	98000	88000	98000
Add:
Salary	10000		5000
Interest on Capital	9800	8800	9800
Less:
Withdrawal	10000	10000	10000
Share of loss (5:2:3)	39700	15880	23820
Closing Capital	68100	70920	78980
Second Year
	Winston	Durham	Salem
Opening Capital	68100	70920	78980
Add:
Salary	10000		5000
Interest on Capital	6810	7092	7898
Less:
Withdrawal	10000	10000	10000
Share of loss (5:2:3)	2900	1160	1740
Closing Capital	72010	66852	80138

Notes

	1 Year	2 Year
Profit (Loss)	-36000	31000
Less:
salary	15000	15000
Interest on Capital	28400	21800
Net Profit (loss)	-79400	-5800

2) Since there is no adjustment of goodwill and revaluation, Therefore the capital balance of old partners will not be changed.

Only percentage of ownership interest will be changed.

Jennings capital will be 250000