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Topic: Allocation of Interest on Capital Accounts and Profit to Partners

LO: 4

12. 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.

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

Answer:

The weighted-average Capital Accounts for the three partners and the allocation of capital account interest is as follows:

Partner		Weighted Average Capital Account Balance		Interest Allocation
A		$750,000 x 12/12 = $750,000		$750,000 x 5% = $37,500
B		$750,000 x 12/12 = $750,000		$750,000 x 5% = $37,500
C		($0 x 3/12) + ($450,000 x 9/12) = $337,500		$337,500 x 5% = $16,875

The allocation of partnership profit is as follows:

	A	B	C	Total Allocation	Remaining
Excess of revenues over expenses					600,000
Salary			75,000	75,000	525,000
Interest @ 5%	37,500	37,500	16,875	91,875	433,125
Allocation of residual profit	173,250	173,250	86,625	433,125	---
Total Allocation	210,750	210,750	178,500