Question

Calvin and Hobbs formed a partnership with capital contributions of $150,000 and $180,000, respectively.The partnership agreement called for Calvin to receive a $60,000 annual salary allowance. They also agreed to allow each partner a share of income equal to 10% of their initial capital investments. The remaining income or loss is to be divided equally. If the net income for the current year is $110,000, what are Calvin and Hobbs respective ending capital balances after they each withdrew $40,000 for the year?

Answer 1

Solution:

The ending capital balances are as follows:

Calvin : $193,500

Hobbs : $166,500

Explanation:

	Calvin	Hobbs
Initial Investment	$150,000	$180,000
Add : Allocated Income	$83,500	$26,500
Less : Drawings	(40,000)	(40,000)
Ending Capital Balance	$193,500	$166,500

Working Note :

Allocation of Partnership Income

	Calvin	Hobbs	Net Income
Net Income			$110,000
Salary Allowance	$60,000		(60,000)
Balance of Net Income			$50,000
Interest (@10%)	$15,000	$18,000	(33,000)
Balance of Net Income			$17,000
Balance to be divided equally	$8,500	$8,500	(17,000)
Allocated Partnership Income	$83,500	$26,500