Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investme

Question

Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Cleary's capital balance at the end of 2012? $117,000. $119,000. $100,000. $129,000. $153,000.

Explanation / Answer

Given Partnership Ratio between Cleary,Wasser and Nolan =20:40:40

Compuation of Closing capital Balance of Mr Cleary at the end of 2012

Opening Capital = $100000

+10% Interest on begining capital Balance each year (100000*10%)= $10000

-Monthly Drawings ($1000*12) = $12000

+Share in Profits (($150000-(450000*10%))*20% = $21000

Capital Balance for the year end 2012 $119000

Note:

Interest on capital ($100000+$150000+$200000) has to be deducted from net profits before sharing of profits as it is already added to partners capital account.

Compensation paid to Mr Wasser is irrelevent as net profit arrived after deducted such expenditure.

Mr Clearys Capital balance for the year end 2012 is $119000

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