Question

Purkerson, Smith, and Traynor have operated a bookstore for a number of years as a partnership. At the beginning of 2018, capital balances were as follows: Purkerson Smith Traynor $ 58, eee 38,000 20,000 - Due to a cash shortage, Purkerson invests an additional $12,000 in the business on April 1, 2018 Each partner is allowed to withdraw $900 cash each month. The partners have used the same method of allocating profits and losses since the business's inception: • Each partner is given the following compensation allowance for work done in the business: Purkerson, $14,000; Smith, $24,000: and Traynor, $4,000. • Each partner is credited with interest equal to 20 percent of the average monthly capital balance for the year without regard for normal drawings • Any remaining profit or loss is allocated 4:2:4 to Purkerson, Smith, and Traynor, respectively. The net income for 2018 is $34,000. Each partner withdraws the allotted amount each month. What are the ending capital balances for 2018?

Answer 1

CAPITAL ACCOUNT

Particulars	Purkerson	Smith	Traynor	Particulars	Purkerson	Smith	Traynor
Withdrawal ( Drawings)( 900 *12)	$10,800	$10,800	$10,800	Balance b/d	$58,000	$38,000	$20,000
Withdrawal (Drawings) (4:2:2)	$13,200	$6,600	$13,200	Additional Capital	$12,000
				Compensation Allowance	$14,000	$ 24,000	$4,000
Ending Balance c/d	$73,400	$52,200	$4,000	Interest on capital	$11,600 +$1800=$13,400	$7,600	$4,000
Total Balance	$97,400	$69,600	$28,000	Total Balance	$97,400	$69,600	$28,000

Working Note;

Withdrawal Amount (4:2:4) = Compensation Allowance + Interest on Capital - Net Income

= ($14,000 + $ 24,000 + $4000 ) + ($13,400 + $7,600 + $4,000)

= $42,000 + $ 25,000 - $ 34,000

= $ 33,000

Purkerson = $33,000 * 4/10 = $13,200

Smith = $ 33,000 * 2/10 = $ 6,600

TrayoTraynor = $ 33,000 * 4/10 = $ 13,200

​​​​2 . Calculation of Interest in capital = $12,000 *9/12 =$9,000 *20% = $1800