Question
Answer is already provided...please show solutions / the math on how to get the numbers Topic: Allocation of Interest on Capital Accounts and Profit to
Answer is already provided...please show solutions / the math on how to get the numbers
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 |
|
|
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