Jerry, a partner in the JSK partnership, begins the year on January 1, 2011 with

Question

Jerry, a partner in the JSK partnership, begins the year on January 1, 2011 with a capital balance of $20,000. The JSK partnership agreement states that Jerry receives 6% interest on this weighted average capital balance.

• On March 1, 2011, when the partnership tax return for 2010 was completed, Jerry's capital account was credited for his share of 2010 profit of $120,000.
• Jerry withdrew this amount quarterly, beginning April 1.
• On September 1, Jerry's capital account was credited with a special bonus of $60,000 for business he brought to the partnership.

What amount of interest will be attributed to Jerry for year 2011 that will go toward his profit distribution for the year? (Use a 360-day year for calculations.)

The answer is 6,000, can someone explain?

Explanation / Answer

Share of Profit is for 2010 , so it is to be taken from 1st january as capital balance . It does not matter when it is being credited .

As 1st withdrawl of share of profit is done on April 1 therefore there are 2 more quarter to be withdrawn as first quarter has been passed away.

Quarterly withdrawl amount = 120000/3 = 40000

Weighted average capital balance = (20000+120000)*3/12 + (140000-40000)*3/12 +(100000-40000)*2/12 + (60000+60000)*1/12 + (120000-40000)*3/12

Weighted average capital balance = 100000

Interest on this weighted average capital balance = Weighted average capital balance*Interest rate

Interest on this weighted average capital balance = 100000*6%

Interest on this weighted average capital balance = $ 6000

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