Macy and John have capital account balances at the end of the year of $100 000 and $25 000 respectively. Profit of the partnership is $105 000. The profit and loss sharing agreement calls for (1) a salary of $40 000 to Macy and $35 000 to John, (2) interest of 5% p.a. on capital balances, (3) the residual profit to be split 80:20 in favour of Macy. Macy's share of the distribution is:
A) $26 000
B) $64 000
C) $41 000
D) $45 000

Question

Quizplus · Accepted Answer

First, we need to calculate the interest on the capital balances of each partner:
- Macy's interest = 5% x $100 000 = $5 000
- John's interest = 5% x $25 000 = $1 250

Then, we deduct the salary and interest amounts from the total profit to find the residual profit:
$105 000 - ($40 000 + $35 000 + $5 000 + $1 250) = $23 750

According to the profit and loss sharing agreement, Macy gets 80% and John gets 20% of the residual profit:
- Macy's share = 80% x $23 750 = $19 000
- John's share = 20% x $23 750 = $4 750

Finally, we add up each partner's salary, interest, and residual profit to get their total share of the distribution:
- Macy's total share = $40 000 + $5 000 + $19 000 = $64 000
- John's total share = $35 000 + $1 250 + $4 750 = $41 000

Therefore, the answer is B) $64 000.

Macy and John Have Capital Account Balances at the End