[GeauxAwayCPA]

Does anyone have a simple way to explain the following problem? I don’t think I’m getting the bigger picture of what’s going on here. And also possibly a quicker way to get to the end goal? Love how we are supposed to read, assess, and establish this nice, elaborate chart in 90 seconds or less…

During 20X1, Young and Zinc maintained average capital balances in their partnership of $160,000 and $100,000, respectively. The partners receive 10% interest on average capital balances, and residual profit or loss is divided equally. Partnership profit before interest was $4,000. What amount should Zinc’s capital account change for the year?

A. $1,000 decrease

B. 2,000 increase

C. $11,000 decrease

D. $12,000 increase

Answer A is Correct. Solution below:

Interest awarded to the partners based on average capital account balances is added to their capital accounts, and deducted from partnership profits. The remaining amounts are divided equally among the partnership capital accounts (as agreed).

Alloc. to Alloc. to Total
Young Zinc Allocated
——— ——— ———
Profit before interest $ 4,000
Interest allocation
To Young (10% x $160,000) $16,000 (16,000)
To Zinc (10% x $100,000) $10,000 (10,000)
——–
Residual allocation (1) (22,000)
To Young (50% x $22,000) (11,000) 11,000
To Zinc (50% x $22,000) — (11,000) 11,000
——– ——– ——–
Increase in Young capital $ 5,000
Decrease in Zinc capital (1,000)

1 Residual is $4,000 – $16,000 – $10,000 = $(22,000)

[wombataholic]

Here's how I look at the question: Young and Zinc get paid 10% interest on their capital balances as part of the profit/loss of the partnership. Partnership profit before the interest is $4,000. Post-interest income/losses are split equally. Young's balance started at 160,000. Zinc's balance started at 100,000.

Interest:
260,000 x 10% = 26,000 (10k of that is Zinc's, so Zinc's balance will go from 100,000 to 110,000)

Pre-interest profit – interest = post interest income/loss
4,000 – 26,000 = -22,000

The 22k loss is then divided between the 2 partners, so zinc's balance goes from 110,000 to 99,000.

Starting balance: 100,000
Ending balance: 99,000
Change: -1,000

Licensed CPA
Passed each section on the first try with Ninja Notes/MCQ/Audio

[Author]

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