Bonnie and Cathy have a profit and loss sharing agreement where: (1) salaries of $20 000 each are credited, (2) 10% interest is allowed on capital balances (3) the remaining profit or loss is split 60-40 in favour of Bonnie. At the end of the year, before the distribution of profits or losses, capital account balances were $50 000 and $35 000 for Bonnie and Cathy, respectively. Profit for the year was $66 000 before distributions to partners. Assuming capital balances are adjusted to reflect profits and losses, what is Bonnie's ending capital account balance?

Question

Quizplus · Accepted Answer

Step 1: Calculate interest on capital balances for both partners.
Bonnie: 10% x $50 000 = $5 000
Cathy: 10% x $35 000 = $3 500

Step 2: Calculate profit available for distribution.
Profit before distributions = $66 000
Salary credit = $20 000 + $20 000 = $40 000
Interest on capital balances = $5 000 + $3 500 = $8 500
Profit available for distribution = $66 000 - $40 000 - $8 500 = $17 500

Step 3: Allocate profit according to the profit and loss sharing agreement.
Bonnie's share = 60% x $17 500 = $10 500
Cathy's share = 40% x $17 500 = $7 000

Step 4: Adjust capital account balances to reflect profit and loss distributions.
Bonnie's ending balance = $50 000 + $5 000 + $10 500 = $65 500
Cathy's ending balance = $35 000 + $3 500 + $7 000 = $45 500

Therefore, Bonnie's ending capital account balance is $65,500, which corresponds to choice C.

Bonnie and Cathy Have a Profit and Loss Sharing Agreement