# Answered Essay: ng of 2018, capital balances were as follows: Due to a cash shortage, Purkerson inv

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: Due to a cash shortage, Purkerson invests an additional \$10,000 in the business on April 1, 2018. Each partner is allowed to withdraw \$800 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, \$13,000: Smith, \$23,000: and Traynor, \$6,000. Each partner is credited with interest equal to 10 percent of the average monthly capital balance for the year without regard for normal drawings. Any remaining profit or loss is allocated 3: 3: 4 to Purkerson, Smith, and Traynor, respectively. The net income for 2018 is \$32,000. Each partner withdraws the allotted amount each month. What are the ending capital balances for 2018?

Solution

Interest on capital of Purkerson:

Capital balance from Jan 1 to April 1 =50,000×3 months=\$150,000

Capital balance from April to Dec=60,000×9=\$540,000

Total capital=\$690,000

Average capital=\$690,000/12=\$57,500

Interest on capital=\$57500×10%=\$5,750

Allocation of income:

 Purkerson Smith Traynor Total Interest on capital \$5,750 \$3,600 (36000×10%= \$1,500 (15000×10%) \$10,850 Salary \$13,000 \$23,000 \$6,000 \$42,000 Remaining income (loss)[32000-10850-42000] (6,255) (6255) (8340) (20,850) Total \$12,495 \$20,345 (840) \$32,000

Capital balance:

 Purkerson Smith Traynor Opening capital \$50,000 \$36,000 \$15,000 Add Additional capital \$10,000 – – Add income \$12,495 \$20,345 (840) Less drawings(800 per month) (9,600) (9,600) (9,600) Ending capital balance \$62,895 \$46,745 \$4,560
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