Assume that there are three partners in a partnership, A, B, and C. Partner C pr
ID: 2475543 • Letter: A
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
Explanation / Answer
Average capital balance of C is calculated as 450,000 * 9/12 = 337,500 as the capital was available for 9 months only
Partner A B C Total Average capital 750,000 750,000 337,500 Total revenue 600,000 Less salary 75,000 75,000 Less interest 37,500 37,500 16,875 91,875 Balance 433,125 Ratio 40% 40% 20% Allocation of profits 173,250 173,250 86,625 433,125