Smith, West, and Krug form a partnership. Smith contributes $180,000, West contributes $150,000, and Krug contributes $270,000. Their partnership agreement calls for a 5% interest allowance on the partner's capital balances with the remaining income or loss to be allocated equally. If the partnership reports income of $174,000 for its first year, what amount of income is credited to Krug's capital account?

Question

Quizplus · Accepted Answer

The total capital balance is $600,000 ($180,000 + $150,000 + $270,000). The interest allowance for each partner is 5% of their capital balance. 
Smith's interest allowance is $9,000 ($180,000 x 0.05)
West's interest allowance is $7,500 ($150,000 x 0.05)
Krug's interest allowance is $13,500 ($270,000 x 0.05)

The total interest allowance is $30,000 ($9,000 + $7,500 + $13,500).

Income remaining after the interest allowance is $144,000 ($174,000 - $30,000).

This remaining income will be allocated equally among the partners: 
$48,000 for each partner ($144,000 / 3).

The total credited to Krug's capital account will be the sum of his interest allowance and his share of the remaining income. 
$13,500 + $48,000 = $61,500.

Therefore, the answer is C.

Smith, West, and Krug Form a Partnership