[Kairos]

I can follow the math in this problem, I just have an issue comprehending how young’s capital is increasing. i see the math, I just have trouble wrapping my head around it. It almost seems like magic that zinc’s capital will decrease but young’s capital will increase. can anyone explain what’s going on in the background here?

sorry about the bad formatting

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?

Correct A.

$1,000 decrease

B.

$2,000 increase

C.

$11,000 decrease

D.

$12,000 increase

You are correct, the answer is A.

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

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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)

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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

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Increase in Young capital $ 5,000

Decrease in Zinc capital (1,000)

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