Mary and Paul have capital account balances at the end of the year of
$100 000 and $80 000 respectively. Profit of the partnership is $90 000. The profit and loss sharing agreement calls for (1) a salary of $25 000 to Mary and $15 000 to Paul, (2) 10 % p.a. interest on capital balances, (3) the residual profit to be split 60:40 in favour of Mary. What is Mary's share of the distribution?

Question

Quizplus · Accepted Answer

First, calculate the salary and interest allocations: Mary gets a $25,000 salary and Paul gets a $15,000 salary. Interest on Mary's capital is $100,000 * 10% = $10,000, and on Paul's capital is $80,000 * 10% = $8,000. Total allocations before splitting the residual profit are $25,000 + $10,000 for Mary and $15,000 + $8,000 for Paul. The total profit to be distributed is $90,000. Subtracting the allocated amounts ($25,000 + $15,000 + $10,000 + $8,000 = $58,000) from the total profit leaves $32,000 to be split 60:40 between Mary and Paul. Mary's share of the residual profit is $32,000 * 60% = $19,200. Adding this to her salary and interest gives Mary a total of $25,000 + $10,000 + $19,200 = $54,200.

Mary and Paul Have Capital Account Balances at the End