Tammy and Beverly formed a limited partnership for the production of pencils. Tammy and Beverly share profits and losses in the partnership which are currently 15% to Tammy and 85% to Beverly. Tammy is a general partner and Beverly is the limited partner. They own a factory and built it at a cost of $1.5 million. They invested $210,000 of their own money: $45,000 from Tammy and $165,000 from Beverly. They also borrowed $850,000 on a nonrecourse basis. About the first three years they have broken even, but now have started making money. In the partnership agreement once total profits and gains throughout the years of the partnership equal the amount of losses throughout the years of the partnership profits and losses will thereafter be shared in half. The only general partner, Tammy is the only one who will need to make up any deficit in the capital accounts if ever there needs to be one. Limited partner, Beverly only is for the amount of money she has invested in the business. The agreement does include both a qualified income offset and a minimum gain charge back provision. The partnership also provides that the first $210,000 of distributions to the partners must be made 15% to Tammy and Beverly 85%, so that they get their initial contributions back in the proportion they made them. Thereafter, distributions will be split in half. The partnership is taking $55,000 per year depreciation on the building they built.

Questions:

1. Assume the Tammy's and Beverly's Partnership broke even on its operations over the first three years. How should the $55,000 of annual depreciation have been allocated for each of the first three years?

2. Lastly, Calculate each partners capital account at the end of each of the first three years.