Assume that there are three partners in a partnership, A, B, and C. Partner C pr
ID: 2475559 • 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
Schedule of allocation Partner A Partner B Partner c Total Profit before allowances & Interest 600000 Less: salary allowance 75000 -75000 Less: Interest 75000 75000 33750 -183750 Profit after allowance and interest 341250 Profit divided in ratio of 4;4:2 136500 136500 68250 -341250 Total 211500 211500 177000 Ans Interest is calculated on the basis of weighted average capital Capital Balance No.of months Weighted Average W Interest 10% on W Partner A 750000 12/12 750000 75000 Partner B 750000 12/12 750000 75000 Partner c 450000 9/12 337500 33750